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Japanese stocks hit 31-year high on post-Suga hopes

Prime minister's decision to step down spurs rally

Japanese stocks hit their highest in over three decades on Sept. 14, boosted by Prime Minister Yoshihide Suga's decision to step down. (Photo by Tetsuya Kitayama)

TOKYO -- Japan's benchmark stock index hit its highest level in 31 years on Tuesday, spurred by gains in U.S. shares and hopes that Japan's next prime minister will spend big to boost the economy.

The Nikkei Stock Average closed at 30,670.10, up 0.73% from the previous day. It topped this year's record of 30,467, reached in February. The benchmark index also reached its highest point since August 1990. Electronics, automotive and chemicals stocks led the gains, which come on the heels of an 8% surge in the index so far this month.

The rally has been underpinned by Prime Minister Yoshihide Suga's decision not to run for reelection in the Liberal Democratic Party's leadership contest scheduled for Sept. 29. The winner of the LDP vote will become Japan's new prime minister amid rising demand for better measures to control COVID-19 and a hefty fiscal package to revitalize the economy.

"Suga's lack of popularity raised concerns that the ruling coalition will lose its majority in the [Lower House] election" scheduled for after the LDP election, said Tomoichiro Kubota, senior market analyst at Matsui Securities. "The change of prime minister has led to the view that the current regime will continue, reducing political risk."

Japanese stocks had eased after reaching their February high, which left them looking undervalued compared to U.S. and European markets.

Japanese equities showed strong momentum in their recovery from the coronavirus-induced global market downturn last year, however, the spread of the contagious delta variant this summer and its impact on the economy had dampened investor sentiment.

But many companies have reported positive earnings surprises for the current fiscal year and, according to Nikkei research, one in four companies on the Tokyo Stock Exchange reported record net profit for the April-June period.

Expectations for economic reopening are also on the rise. As the rollout of vaccines accelerates, the government is set to ease some of its restrictions on domestic travel and restaurant dining this autumn, fueling investor optimism.

The Nikkei index's 31-year high comes after decades of economic stagnation with the bursting of the asset price bubble leaving businesses wounded and individuals reluctant to invest.

The situation started to change in 2012 after Shinzo Abe began his second stint in office. In a bid to lift the economy, the former prime minister announced his Abenomics policies, consisting of massive monetary easing, fiscal stimulus and structural reform, which attracted foreign investors.

The Nikkei index has soared nearly 240% since November 2012, when the Abenomics rally took off. Japan's rise during this period is bigger than other global benchmarks like the Dow Jones Industrial Average and Hong Kong's Hang Seng Index.

However, the Nikkei index is still 21% below its all time high of 38,915, recorded on Dec. 29, 1989. And in the time Japan has recovered its 31-year peak, other countries have seen their stock markets boom: the Dow has surged to levels 13 times its price in August 1990.

Japan's equity market has recovered its "lost 30 years," but for continued upward momentum and future growth, the country needs to tackle a host of issues, including an aging society and depopulation, as well as lack of tech powerhouses.

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