EDITORIAL |  Use the Latest Nikkei High to Launch Further Corporate Reforms

The benchmark Nikkei stock index hit a new all-time high on Thursday, February 22, closing at ￥39,098 JPY ($259.73 USD). That surpassed its previous peak of ¥38,915.87 ($259.49), set on December 29, 1989, during the bubble economy. 

Eclipsing the previous high of 34 years ago may be one sign that Japan's economy is finally ready to escape the long spell of stagnation, which gave birth to the expression "lost 30 years."

Japan's stock market continues to surge upward. The Nikkei has gained more than ¥5,000 JPY since the beginning of 2024 alone. Some observers have detected overheating in the market. But this rise is still important as high stock prices serve as a tailwind for corporate managers. 

The key question now is whether they can step up their efforts to improve corporate value, ratchet up their growth potential, and whether they can make growing a strong economy led by the private sector a reality. 

Learning from the Bubble Era High

The previous market peak of 1989 was emblematic of the strength of the Japanese economy. It is a far different situation now. The bursting of the bubble and a prolonged period of deflation have led to stubborn stagnation. 

Furthermore, the recent rise in stock prices has not dispelled concerns about a slump in personal consumption. That seems to be caused by the recent rise in prices. 

It is encouraging that domestic and foreign investors are turning towards Japanese shares despite these conditions. One factor at work, especially for foreign investors, is that investment flows have shifted from China to Japan due to the stagnation in the Chinese economy. 

An upshot is that the total market capitalization of stocks listed on the Tokyo Stock Exchange has surpassed that of the Shanghai Stock Exchange. In other words, the TSE has regained the top spot for Asian markets for the first time in three and a half years. 

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Behind the Nikkei's Strong Showing

There are several major factors behind improved corporate results. Among them are the penetration of price increases and improved overseas earnings due to the cheap yen. 

It is also worth noting that in 2023, the TSE urged listed companies to increase their value through corporate governance reforms that emphasize capital efficiency. That helped lift share prices. Foreign investors have also been impressed by such things as stock buybacks, increased dividends, and unwinding of cross holdings among companies through share sales. 

The Role of the Market

In addition, the new Nippon Individual Savings Account small investment tax exemption system known as NISA was launched on January 1. With it, there has been stronger interest in stocks among retail investors. Hopefully, it will solidify a "from savings to investment" quantum shift and thereby revitalize the stock market. 

Ideally, the role of the stock market is to encourage economic development centered on growth sectors. This should follow from the efficient use of capital raised by companies through the issuance of shares. Naturally, we need to be cautious regarding inflated stock prices that are divorced from actual management conditions. However, we should always remember that the stock market is the foundation of a capitalist economy.

The new TSE high should serve as an incentive to further promote corporate reforms. Those, in turn, should contribute to market revitalization. 

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(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun