As China’s markets falter, Japan soars toward record high

As China's markets falter, Japan soars toward record high

There is a transformation underway in Asia that is reverberating in global financial markets.

Japan’s stock market, ignored by investors for decades, is making a strong comeback. The benchmark Nikkei 225 index is approaching the record set on December 29, 1989, which effectively marked the peak of Japan’s economic rise before the collapse that led to decades of low growth.

China, long a market that was impossible to ignore, continues to trend downward. Stocks in China recently hit lows not seen since 2015, and Hong Kong’s Hang Seng was the world’s worst-performing major market last year. Stocks were only able to stop their decline when Beijing recently indicated its intention to intervene, but they remained well below previous high levels.

This year was expected to be turbulent for global markets, with unpredictable fluctuations as economic fortunes varied and voters in more than 50 countries headed to the polls. But an unexpected reverse trend is already underway: a change in investor sentiment about China and Japan.

Seizing on this shift, Japanese Prime Minister Fumio Kishida addressed more than 3,000 global financiers who gathered in Hong Kong this week for a conference sponsored by Goldman Sachs. This was the first time a Japanese prime minister delivered a keynote speech at the event.

“Japan now has a golden opportunity to fully overcome the low economic growth and deflationary environment that has persisted for a quarter of a century,” Kishida said in a video recording. He said his government “will demonstrate to all of you Japan’s transition to a new economic phase by mobilizing all political tools.”

This is the kind of message that Japan has been honing for a decade, and now investors want to hear more of it. Foreign investors pumped $2.6 billion into the Japanese stock market last week, in addition to $6.5 billion the previous week, according to data from the Japanese Stock Exchange Group. This represents a stark reversal from the nearly $3.6 billion extracted in December.

All that money sent Tokyo’s Nikkei 225 index up 8 percent this month. The market is up more than 30 percent over the past 12 months. Toyota’s value rose this week to a record market value for a Japanese company, at about $330 billion, surpassing the mark set by telecommunications group NTT in 1987.

A combination of factors have contributed to Japan’s recent success. The weak yen has made stocks look cheap to foreign investors, and has also been a boon for Japan-based exporters and multinational companies that make their profits abroad. Important reforms introduced in the corporate sector have given shareholders more rights, enabling them to demand changes in strategy and management. Unlike inflation in other parts of the world, rising inflation in Japan was a sign that things were moving in the right direction, after decades of falling prices and slow economic growth dampened consumers’ and businesses’ appetite for spending.

There is one additional factor: geopolitics. The long-term prospects for Japan, the third-largest economy, look good while parts of the world are nervous about the second-largest economy, China.

“One of the best things to happen to Japan is China,” said Seth Fisher, founder and chief investment officer of Oasis Management, a Hong Kong-based hedge fund.

“Japan has been working for 10 years to create a more productive institutional environment and a better place to be an equity investor by constantly trying to improve value,” Mr. Fisher said. “People don’t think the same thing about China.”

In a recent study of global fund managers conducted by Bank of America, selling Chinese stocks and buying Japanese stocks were among the three most popular trading ideas. (The other was to buy high-flying US technology stocks.)

China’s ruling Communist Party has sought to insert itself into business in recent years, which has investors concerned that politics often trumps the bottom line for many of China’s giant companies. The lack of policy and business clarity has also raised concerns in Washington and European capitals, leading to regulations preventing foreign investments in certain sectors and companies.

China has not struggled to achieve economic growth like Japan, but the prolonged real estate market collapse has shaken consumer and investor confidence. Outstanding issues with the Chinese economy have exacerbated weakness in the country’s currency, the yuan.

Much of the negative sentiment has emerged in Hong Kong, an open market where global investors have traditionally placed their bets on China and its companies. The market witnessed a significant decline last year, and declined further during the first three weeks of this year.

Beijing intervened this week to try to reverse the sell-off. On Monday, the country’s No. 2 official, Premier Li Qiang, called on authorities to be more “forceful” and take more measures to “improve market confidence.” His speech sent stocks soaring, as did a report from Bloomberg, citing unnamed officials, that authorities were considering a $278 billion market bailout.

Then on Wednesday, the central bank, the People’s Bank of China, freed up commercial banks to do more lending, essentially pumping $139 billion into the market by cutting the amount of money banks have to hold in reserve. Regulators also relaxed rules on how debt-laden property developers can repay loans.

Words and actions sent the market higher this week, with the Hang Seng Index recording three of its best days of the year. The Shanghai and Shenzhen markets in China also rebounded, but not to the same extent.

But many investors say the measures fail to address a much larger problem: China’s economic trajectory. They remain disappointed with China’s response to the broader economic downturn and its apparent reluctance to provide stunning stimulus, as it has done in previous periods of economic stress.

“We hope that will continue to happen,” said Daniel Morris, an analyst at BNP Paribas, referring to a greater effort to support markets. “But we don’t have confidence that that will happen. Frankly, I would have thought at the end of last year that all the bad news would have been taken into account, and yet we have fallen even further again this year.

Economists, financiers and corporate executives around the world looked to China last year for an economic rebound after its government scrapped its “zero Covid” policy, punishing lockdowns that had at times put the country into an economic freeze. But Chinese consumers have not engaged in the kind of “revenge spending” seen elsewhere after the reopening, and the property crisis has weighed heavily on households, many of whom have nearly three-quarters of their savings tied up in real estate.

“There’s not a lot of confidence at the domestic level, and then there’s a government that’s not very interested in supporting the economy,” said Louis Kuijs, chief Asia economist at S&P Global Ratings. “Markets had somehow expected much more and were becoming increasingly disillusioned and disillusioned.”

The ranks of the frustrated include some Chinese investors, who have been moving money into exchange-traded funds that track Japanese stocks. Sometimes, the prices of these funds traded well above the value of their underlying assets, a sign of investors’ enthusiasm for investing.

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