TOKYO -- Cash-rich Japanese companies have finally opened their wallets for pay raises and growth investments, helping spur the stock market even higher on hopes for stronger consumer spending and the start of a virtuous cycle.
The Nikkei Stock Average advanced 263.14 points Friday to end the day at 19,254.25, closing above 19,000 for the first time in nearly 15 years. The benchmark index passed 18,000 just 19 trading days ago, on Feb. 16. This sharp growth is on par with the rally in spring 2013, just after the Bank of Japan implemented unprecedented monetary easing, when the index rose 1,000 points in 18 trading days.
Looser monetary policy worldwide has created a flood of money overseas. These funds are flowing into Japanese stocks amid expectations for change, said Takashi Ito of Nomura Securities. Factory robot maker Fanuc offers an example. The company had taken a passive approach to investor relations, but its shares jumped Friday on news that it plans to focus on dialogue with shareholders. Foreign investors are sensitive to such changes.
In another shift, listed companies are starting to put their record 90 trillion yen ($735 billion) in cash toward wage hikes and growth investments. Mergers and acquisitions by Japanese companies involving foreign businesses are climbing to all-time high in the January-March period, already reaching roughly 4 trillion yen. Canon and Asahi Kasei, among others, are going ahead with major purchases.
Meanwhile, Toyota Motor and other giants enjoying strong earnings are expected to proceed with pay raises.
Paper gains on household shareholdings have grown by 63 trillion yen since the end of September 2012, before Abenomics fueled a bull market, according to the Daiwa Institute of Research. Rising incomes, combined with the wealth effect seen so far, are expected to spread the benefits of the rising market to a larger segment of the population.
The growth in domestic-demand-driven issues reflects these structural changes. Meiji Holdings and JR Tokai, which runs the Shinkansen bullet train in central Japan, both have surged more than 30% so far this year. Meiji, a food and drug company, moved to raise prices, while the railway operator has been buoyed by an increase in foreign tourists. Domestically oriented companies have been making a clear effort to grow overseas, as indicated by the Nippon Telegraph & Telephone group's move to buy a German company.
The earlier exporter-led rally giving way to the buying of a wider range of stocks has also contributed to the sustained uptrend.
Indicators show few signs of overheating. The projected average price-earnings ratio is 18 for fiscal 2014 but just 15 for fiscal 2015, lower than the average of 18 for U.S. stocks. There is little of the overheating seen during the information technology bubble, when the average P/E ratio swelled to over 100.
As for predicting the outlook for the equities market, the focus will be on the expected hike in U.S. interest rates. With Japan, Europe and emerging markets all adopting loose monetary policy, "the U.S. is supporting the global economy on its own," said Shinichiro Kadota at Barclays.
But earnings are deteriorating at U.S. companies, and concerns have emerged over a slowdown in retail sales and other consumer spending. If the economic recovery lags or the U.S. puts off a rate hike, the dollar could weaken against the yen, hurting earnings at Japanese exporters.
Europe has the problems in Greece to worry about. Money has started to flow out of emerging markets again in anticipation of a U.S. rate hike. Turning hopes for a sustained rally in Japanese stocks into reality will require economic stability domestically and overseas as well as active use of cash by Japanese companies.