Ukraine and pandemic aftermath set scene for reversal of main stock index underperformance
Even after this year’s 26 per cent rally in Japanese equities, one US dollar invested in Japan’s main stock index, Topix, at the end of December 1989 would, almost 34 years later, still only be worth around 80 cents. If that dollar had been invested in the S&P 500, the main US index, its value would have multiplied more than 12 times over that period. For anyone who has dedicated their career to the Japanese markets, these are humbling statistics.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser. and the government’s plan to double financial asset income for individual investors represent just two pillars of a longer-term growth strategy. But this is not the first time we have seen rising optimism regarding equities. Despite its lacklustre longer-term returns since the bursting of the Japanese equities bubble in, late-1989, Topix has had multiple periods of outperformance versus global peers since then. These rallies have all ended in disappointment and decline, though.
All three rallies were triggered by policy responses to preceding periods of crisis. These policies convinced foreign investors that Japan’s structural challenges were being addressed, causing an acceleration of net foreign investor buying of Japanese equities, which in turn pushed the market higher. The upward trajectory continued until unexpected political change, or an adjustment in policy direction, or investor impatience with the pace of reform, undermined the momentum.
However, Topix remains under-owned by foreign investors and domestic households, compared with previous peaks. This positioning might need to be reassessed if the momentum behind reform is maintained.
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