Nikkei hits 40,000 mark; what's behind the bull-run in Japanese markets?

Japan's key stock index, Nikkei 225 breached the 40,000-point milestone on Monday, driven by a surge in technology shares. The Nikkei share average closed with a 0.7 per cent gain, reaching 40,192.48. The broad-based Topix registered a marginal 0.1 per cent gain after surpassing the 2,700 mark and reaching a record high the previous Friday.

This surge was led by semiconductor-related stocks, including Tokyo Electron and Advantest, both experiencing a 3 per cent rise.

The upward movement also follows a notable rally in US stocks last Friday, highlighted by chipmaker Nvidia's market capitalisation exceeding $2 trillion. Investors, analysts said, are optimistic about the continued growth in artificial intelligence, expecting sustained semiconductor spending and benefiting Japanese companies involved in the manufacturing process.

A record rally at Japanese exchanges

The Nikkie benchmark index has been experiencing an unprecedented rally, as it achieved an all-time high for the first time in 34 years last month. The Nikkei had previously closed above its former all-time high from December 1989 on February 22.  

This recent rally is also attributed to robust earnings and investor-friendly initiatives implemented by the Japanese government. Accordingly, foreign investors have considerably pushed the Nikkei's rally, attracted by corporate governance reforms, a weakened yen, and the Nippon Individual Savings Account (NISA), a tax-deferred investment program designed for small investors.

The index has surged over 20 per cent year-to-date, while the broad based Topix has recorded an almost 15 per cent increase. Semiconductor-related companies, particularly those involved in chip making equipment and materials, have been among the most actively traded stocks.

Gen AI’s boost

The generative AI boom has positioned Japan as an alternative manufacturing host, with Taiwan Semiconductor Manufacturing Co. establishing facilities in Kumamoto prefecture, and Japan's new state-backed semiconductor company, Rapidus, partnering with IBM to produce cutting-edge chips domestically.

Global investors have turned their attention to Japan's industrial base, recognising its role in supporting the semiconductor boom. Despite Japan's semiconductor industry losing ground in chip design and manufacturing, it remains highly competitive in chip making equipment and materials. According to the World Economic Forum, Japan holds a dominant 56 per cent share in chip making materials, and a strong 32 per cent share in chipmaking equipment.

Japanese technology, especially capable of intricate processes, plays a crucial role in producing advanced semiconductor devices for artificial intelligence, attracting investor interest.

Strong economic growth

Analysts believe that the growth momentum in the Japanese stock market is also due to its sound economic growth in 2023. They say that the country saw a 40 year high in its gross domestic product in 2023.

"For nearly four decades (1982-2023) the average GDP growth rate in Japan was 0.34 per cent. But in 2023, the GDP growth rate came a little above 1 per cent, registering as the best score in the four decades," said G Chokkalingam, Founder, MD of Equinomics Research.

Chokkalingam further stated that in 2023, the Japanese market gave a 28 per cent return, on top of that it again soared in Jan-Feb and continues to do so. "Apart from record GDP numbers last year, another reason for foreign investors' interest was weakening of the Yen, coupled with booming corporate profits in 2023 gave the markets an edge in 2023,” he added.

The booming profits meant corporations rewarding the shareholders with dividends and buybacks. Further, the slowdown in neighbouring country China  also came in as a blessing in disguise for Japan as investors shifted interest from the Chinese market.

However, analysts cautioned that in 2024 market returns may not be a replica of 2023. “The market may not rise significantly in 2024 as the GDP growth in the year is expected to de accelerate. Therefore, there could be profit booking and economics activity may not be attractive. At best, the markets can give a poor single digit return in the 2024 calendar year” Chokkalingam added.