Over the past year or two, the Japanese stock market has arguably been one of the brightest performing markets in the world's capital markets. Since the beginning of 2023, the Nikkei 225 index has surged from around 26000 points to a high above 40,000 points, gaining more than 50% to topple the major global indices and become a festive feast for some investors! Such market explosiveness has also caught the eye of many global investors.

What is the deep logic behind the massive rally in the Japanese stock market? First, we have to mention the existence of one of the greats of the investment world - Warren Buffett. The fact that the shares of Japan's five largest trading companies are to some extent supportive of the strong performance of Japanese companies and the future profitability of Japanese companies, has undoubtedly injected the Japanese stock market with a strong injection of strength, increased the overall confidence and warmth of the market, and prompted some foreign investors to move in. By entering the Japanese stock market, this increased capital was also an important driver for the rise of the Japanese stock market.

Secondly, the improvement in the profits of Japanese listed companies is an important basis for the rise of the Japanese stock market. According to the China Central Bank report, in 2012-2023, the composite growth rate per share of the JPY index constituents was close to 10%, and the performance growth was an important driver of share price gains.

Thirdly, the upward momentum of the Japanese stock market is also due to the fact that listed companies as a whole have significantly increased dividend distributions. In recent years, due to the reform of the Tokyo Stock Exchange and the increasing stability of the companies themselves, many Japanese listed companies have significantly increased their dividend rates. Dividends, like cash handouts to the market, are an important way for listed companies to return to shareholders and make listed companies more attractive to investors.。

Summing up this history, the rise of the Japanese stock market has not only opened a new value high for investors seeking global asset allocations, but also conveys a clear message: keeping a close eye on the investment dynamics of industry giants, a deep understanding of the impact of corporate finances on share price performance, and a grasp of quality companies. Red potential is the key for every smart investor to make good global capital allocation.

Behind the current brilliance of the Japanese stock market, there is also a period of history that has experienced high and turbulent times. Next, let's walk along the historical corridor to explore the major events of the Japanese stock market and the valuable insights they bring.

First, the growth and development of the Japanese stock market (1878-1945)

The origins of the Japanese stock market can be traced back to the Meiji Restoration period. In 1878, the Meiji government enacted the “Stock Trading Ordinance” and the joint establishment of the Tokyo Stock Exchange and the Osaka Stock Exchange, marking the formal birth of the Japanese stock market. At the beginning, the stock market also entered its first period of high growth due to the booming Japanese economy. The Nikkei 225 index started at a low base during this period and grew at an astonishing rate, reversing several times by the early 1920s.

By 1929, the Japanese stock market was hit hard by the global economic panic. The Nikkei 225 index has plunged nearly 50% in a year, with many investors losing heavily. In order to save the market, the Japanese government introduced the Securities Trading Act in 1934, which strengthened market regulation and introduced a series of rescue measures. These measures have stabilized the market to a certain extent and laid the foundation for a recovery in the stock market.

2. Post-World War II to Bubble Economy: Recovery and Prosperity of the Japanese Stock Market (1945-1990)

After World War II, the Japanese economy recovered rapidly, and the stock market also revived. In 1949, the Tokyo Stock Exchange resumed trading, and the Nikkei 225 index began to climb steadily from its post-war low. With the strong support of the government, the Japanese economy entered an “economic miracle” period, and the stock market boomed with it. But in the meantime, the Japanese stock market has also experienced a multi-round bull run.

After the 1974 oil crisis, the Japanese economy ended a period of high growth, with GDP growth moving from a low of 10% to around 4%. But Japan's industrial structure is rapidly changing and the economy has successfully transitioned from resource-intensive to energy-efficient, technology-intensive, and high-value-added. From heavy industry, chemical and other industries to steel, automobiles, electrical equipment, household appliances, precision instruments, etc., the Japanese economy has gradually shifted from domestic demand-driven to export-led, “Made in Japan” style worldwide. Under the successful economic transformation, the Japanese stock market has emerged from a 16-year bull market.

Especially after the signing of the “Plaza Agreement” in 1985, the yen rose significantly, pushing the Japanese stock market into a full-blown period. By the end of the 1980s, the Nikkei 225 index had approached the 40000 mark. The share of the stock market in GDP is close to 150%, and the bubble is severe.

To prevent further expansion of the bubble, the Japanese government began to implement a tightening monetary policy in 1989, raising interest rates to curb speculative behavior. Starting in May 1989, five consecutive interest rate hikes began in May 1989. Over-aggressive interest rate policies led to a liquidity tightening crisis, and stocks fell off the cliff. In the early 1990s, the Nikkei 225 index plunged nearly 60% in just two years, plunging the stock market into a 20-year low.

The history of the Japanese stock market has also taught investors a vivid lesson: Every market has its own rules, blind pursuit often comes with huge risks. Rational investment and risk control are never outdated.

Third, after the collapse of the bubble economy: twenty years of loss of the economy and the stock market (1990-2010)

After the collapse of the bubble economy, the stock market caused a severe economic collapse, a large number of companies went bankrupt, and the Japanese economy entered a recession, which in turn exacerbated the stock market decline.

The Japanese economy and stock market have entered a 20-year low. To save the market, the Japanese government has taken a series of measures. In 1997, the government launched the “Tokyo Revitalization Plan” to stimulate economic growth through measures such as increased public investment and tax cuts.

At the same time, the government has stepped up its financial reform efforts, reshaped the regulatory system, established a new financial regulatory system with the central bank at the heart of the Treasury, the joint participation of independent central banks and deposit insurers, the local financial authorities, and thoroughly addressed the problem of bad debts. After a short period of pain, Japan's bad debt ratio declined rapidly from 8% after 2001 and remained below 2% after 2005. AT THE SAME TIME, THE JAPANESE GOVERNMENT ALSO AMENDED THE PROHIBITION OF MONOPOLY LAW, AND LIBERALIZED COMPETITION IN THE SECURITIES INDUSTRY REPLACED THE “FOUR-SHER OLIGARCHY”.

Despite the many strong measures taken by the Japanese government, the Japanese stock market is still in a low state due to the difficulties of structural adjustment and the changing economic environment at home and abroad. The Nikkei 225 index also hit a new low of less than 7000 points during the 2008 financial crisis.

In an overall subdued market environment, rational investors need to take risk management as a priority while cultivating inner workings, learning to spot value depletion, paying attention to structural opportunities in industry change, patiently waiting and seizing the moment of reversal.

4. Early 21st century: Stock market recovery and government policy support (2010 to date)

After the dark hours of 2008, the Japanese stock market has remained turbulent for several years, with the JPI 225 index hovering near 10,000 points. At the end of 2012, after the second administration of the Abe government, it introduced a bold monetary easing policy, flexible fiscal policy, and the “Three Arrows” economic growth strategy aimed at attracting public investment. Japan's economy is back on track with positive GDP growth for seven consecutive years.

Meanwhile, the Bank of Japan stabilized its share price by buying stocks. The Bank of Japan started buying ETFs since October 2010. As of February 1, 2024, the market value of ETFs currently held by the Bank of Japan is approximately ¥70 trillion, representing 7.4% of the total market capitalization of Japanese equities, arguably the largest buyer of Japanese stocks in the past decade.

In addition, the Japanese government is also pushing for the introduction of government pension funds. According to the official website of the Government Pension Fund of Japan (GPIF), its domestic stock market has a total assets of 55.8 trillion yen as of the end of the third quarter of 2023, which is not comparable to the market capitalization of ETFs held by the Bank of Japan, which is long and large in size. Large pensions are an important stabilizer for the stock market.

Underpinning the growth in the profits of Japanese corporates, driven by government policy and the buying stimulus of real silver, the Japanese stock market as a whole has enjoyed a slow bull run for more than 10 years in 2012, accumulating almost 4 times over the period of the JPY 225 index, or even more than 3 times that of the S&P 500 over the same period.

On February 22, 2024, the JP225 index rose 2.19% to close at 39098 points, surpassing the high of 1989. It also signaled that the Japanese stock market has officially come out of the shadow of a lost twenty years and a new phase has officially opened.

The movement of the Japanese stock market over the past decade can be said to be a classic trend investment lesson. Face a long-term uptrend like the Japanese stock market, follow the market trend, not try to predict the top and bottom. Following up on time and staying patient tends to reap better returns. Of course, investors must value risk management and adopt a sound asset allocation strategy to avoid excessive concentration of risk.

A review of the centuries-long history of the Japanese stock market, from the revival of the bath fires after the Second World War, to the glorious peak of the bubble era, to the deep adjustment of the “lost twenty years” to the robust revival of the new century, each chapter vividly reveals capital markets and macroeconomic policies, corporate performance, and Close links between changes in the global financial environment.

By reviewing and reflecting on the history of the Japanese stock market, we deeply recognize the importance of rational analysis, flexibility in responding to market changes, and sticking to long-term value investments. Whether past glories or lows, it provides investors with valuable loans and insights that help us to position our assets well in global capital markets and achieve solid asset growth.