What has changed in Japan's economy to fuel the stock boom?
Stocks are seen as cheap in Japan due to the weak yen, which is a boon for exporters seeking profits overseas. Major changes in the corporate sector have given shareholders more rights, allowing them to make positive changes to their shares.
In contrast to the rest of the world, recently rising inflation in Japan has discouraged people and companies from spending after decades of falling prices and sluggish economic growth.
Japanese stocks have also benefited from a slowdown in real estate and China, where economic growth has slowed under the weight of several systemic and political challenges. Chinese markets have recently traded at lows that haven't been reached since a rout in 2015.
Foreign investors play an important role in the development of the market.
Investors from overseas were eager buyers of Japanese stocks, pouring a net $14 billion into the market in January, a stark change from the roughly $3 billion they pulled out in December, according to data from the Japan Exchange Group.
Corporate profits are strong, another reason investors are pouring money into Japan. According to Goldman Sachs, earnings at major Japanese companies rose more than 40 percent in their latest quarterly results. Analysts at the bank noted that even the biggest companies, such as Toyota and SoftBank, posted the biggest earnings surprises. Toyota recently hit a record market value for a Japanese company, about $330 billion, surpassing the mark set by telecom giant NTT in 1987.
“Sceptics continue to argue that Japan will never change, that foreigners will always be disappointed, so get out now,” Goldman analysts wrote. But they said the recent run-up in stocks has been less dramatic than past rallies.
According to a survey of fund managers conducted by Bank of America, buying Japanese stocks is the third most popular trade this year, but it falls short of the top two: betting against China's stock market and buying behemoth tech stocks, such as Apple and Microsoft, the so-called “Magnificent Seven.”
What will the Bank of Japan do next?
Japan's economic growth is shaky. Numbers released last week showed the nation's economy unexpectedly shrank in the fourth quarter, compared to a 3.1 percent increase for the U.S.
While much of the world has raised interest rates to fight inflation, Japan has kept them low in an effort to stimulate it, preferring to intervene in markets to prevent its currency from weakening too quickly, or government bonds rising too sharply.
As growth begins to recover, the central bank is trying to gauge when it's appropriate to raise interest rates — which would support its currency — without stopping inflation altogether.
Complicating matters is the economic impact of the earthquake that struck the Noto Peninsula on the country's west coast in January. Japan's economy will also suffer if the rest of the world starts to slow down.
For now, economists predict the central bank will raise interest rates from negative territory but keep them near zero for the rest of the year.
