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The Nikkei 225 index climbed above 26,000 points on Nov. 17, a level not seen since 1991 after the collapse of Japan's asset price bubble. (Photo by Kei Higuchi)
Market Spotlight

Japan's Nikkei index regains 1991 level as investors hunt bargains

Vaccine-sparked hopes for economic rebound point buyers to value stocks

JADA NAGUMO, Nikkei staff writer | Japan

TOKYO -- Investors anticipating recovery from the coronavirus pandemic are scenting bargains in Japan -- propelling the country's stock market to levels last recorded almost three decades ago.

The blue-chip Nikkei Stock Average index has soared, jumping over 2,500 points, or 11%, since the end of October. Last week it touched 26,014, a level not seen since May 1991, after the collapse of Japan's asset price bubble.

Slight corrections have hit the market in recent days as investors take a breather. However, many anticipate a sustained rise over the longer-term, with a global economic rebound expected to benefit Japan's export-oriented economy.

"Japan's old-economy market structure will likely benefit in the wake of a global economic recovery," said Masafumi Oshiden, head of Japan Equity at BNY Mellon Asset Management in Tokyo.

The Nikkei index has outperformed other major global benchmarks over the period since mid-February, before the COVID-19 panic sent global stock markets into free fall. In the U.S., the Dow Jones Industrial Average is up 2%, while Hong Kong's Hang Seng Index is in negative territory.

Investors have turned hopeful after a positive news flow including a rebound in Japan's July-September gross domestic product, which grew 5% from the preceding three-month period and expanded at an annualized pace of 21.4%, exceeding expectations.

Progress in the development of COVID-19 vaccines by drugmakers Pfizer and Moderna has also buoyed stocks in Japan, offering hope that the world will be able to begin returning to normal.

Along with the Nikkei index, the broader Topix index, comprised of over 2,000 Japanese companies, has jumped 9% since the end of October. However, the Mothers index, for startups, has been less bullish, climbing 2.3%.

Ryutaro Kono, chief Japan economist at BNP Paribas in Tokyo, in a report points to the possibility of other pharmaceutical and biotechnology companies soon reporting clinical trial successes, and the positive effects they would have.

"It will increase confidence that the coronavirus can be controlled, as well as lead to the view that enough will be produced to supply countries around the world," said Kono, adding that the vaccine news will "give a strong incentive for companies to increase capital investment and inventory and] encourage consumers to reduce precautionary savings."

Bank of America's November fund manager survey revealed that over 90% of respondents said the economy will be stronger in the next 12 months while a net of 24% expect value stocks -- those trading at a lower price than the company's performance would suggest -- to outperform growth stocks.

Data shows that foreign investors, in particular, find Japanese stocks to be a buying opportunity. According to the Tokyo Stock Exchange, foreign investors purchased a net 384 billion yen ($3.7 billion) of Japanese equities during the second week of November, following a net 357 billion yen the previous week.

Strong demand for Japanese stocks has prompted major securities companies to revise their view of the market. Goldman Sachs raised its outlook for the Nikkei index and estimates the benchmark will climb to 27,200 in the next 12 months as an economic recovery and improved corporate earnings provide tail winds.

Japanese companies have just finished their second-quarter earnings announcements, with many beating analysts' expectations. A report by Okasan Securities shows that companies comprising the broader Topix benchmark recorded a 15% drop in net profit for the second quarter, a major improvement from the 57% fall in the first quarter. Some companies raised their annual guidance.

Shares in companies such as Honda Motor, ANA Holdings, and East Japan Railway, all of which have a price-to-book ratio below one, have experienced a boost this month as investors rushed into cyclical stocks. Honda and JR East have jumped around 20% while ANA has climbed over 10%, outperforming growth stocks like payment solution provider GMO Payment Gateway and online shopping site operator ZOZO.

Kazuharu Konishi, general manager of Mitsubishi UFJ Kokusai Asset Management's equity investment division, said "the positive momentum in the Japanese market will likely continue into next year," as hopes for a vaccine and expectations for even better third-quarter earnings results boost investor sentiment.

The country remains nervous over a resurgence in COVID-19 infections. The Tokyo Metropolitan Government last week raised its coronavirus alert to the highest of four levels as the caseload jumped. Many prefectures are eclipsing case records day after day. Nationwide, Japan has been confirming upward of 2,000 new cases in recent days.

However, "the scale of infections is very different from other parts of the world," points out BNY Mellon's Oshiden, comparing Japan's battle to countries with more severe outbreaks like the U.S., which has recorded an average of around 900 deaths a day since the beginning of the pandemic.

"The level of Japan's COVID-19 cases are without any strict lockdown measures," he added, "and the country will likely continue to be supported by its ability to keep its economy going."

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