Changes are afoot in Asia, and they are spilling over into global financial markets.
Japan’s stock market, overlooked by investors for decades, is coming back with a bang. The benchmark Nikkei 225 index is inching closer to the record set on Dec. 29, 1989, which effectively marked the peak of Japan’s economic rise before the collapse that led to decades of low growth.
China has long been a market that cannot be ignored, but it is on the decline. Chinese stocks have recently hit their lowest since the 2015 crash, and Hong Kong’s Hang Seng Index was the world’s worst-performing major market last year. Recent signals from the Chinese government that it intends to intervene have halted the decline in stock prices, but they remain well below their previous highs.
This year is expected to be a turbulent one for global markets, with unpredictable swings as economic fates diverge and voters in more than 50 countries go to the polls. However, an unexpected reversal is already underway. This is a change in investors’ perception of China and Japan.
Seizing this shift, Japanese Prime Minister Fumio Kishida addressed more than 3,000 global financiers gathered in Hong Kong this week for a conference hosted by Goldman Sachs. This is the first time that a Japanese prime minister will give a keynote speech at the event.
“Japan now has a great opportunity to completely overcome the low growth and deflationary environment that has lasted for a quarter of a century,” Kishida said in a video recording. He said the government will “mobilize all policy tools to demonstrate to everyone that Japan is moving to a new economic stage.”
It’s the kind of message Japan has been honing for a decade, and now investors want to hear more of it. Foreign investors poured $2.6 billion into Japan’s stock market last week, adding to $6.5 billion the previous week, according to data from Japan Exchange Group. This is a marked change from the approximately $3.6 billion withdrawn in December.
These funds have helped Tokyo’s Nikkei stock average rise about 8% this month. The market has risen more than 30% over the past 12 months. This week, Toyota’s market capitalization rose to about $330 billion, a record level for a Japanese company, surpassing the mark set in 1987 by telecommunications conglomerate NTT.
Several factors have combined to contribute to Japan’s recent success. A weaker yen makes stocks look cheaper to foreign investors, a boon for Japan-based exporters and multinational companies that make profits overseas. Significant reforms to the corporate sector have given shareholders more rights and the ability to demand changes in strategy and management. Unlike inflation in other parts of the world, rising inflation in Japan signals that things are heading in the right direction after decades of falling prices and slowing economic growth reduced consumer and business appetite for spending. It shows.
There’s one more element. It’s geopolitics. While the economy in China, the second largest economy in some parts of the world, is deteriorating, the long-term outlook for Japan, the third largest economy, is positive.
“One of the best things to happen to Japan is China,” said Seth Fisher, founder and chief investment officer of Oasis Management, a Hong Kong-based hedge fund.
“For 10 years, Japan has worked to create a more productive business environment and a better place for equity investors through a consistent effort to improve value,” Fisher said. “People don’t believe the same thing about China.”
In a recent Bank of America survey of global fund managers, selling Chinese stocks and buying Japanese stocks were two of the three most popular trade ideas. (The other was to pile into surging US tech stocks.)
China’s ruling Communist Party has sought to expand into the business sector in recent years, raising concerns among investors that politics often trumps profits for many of China’s biggest companies. The blurring of politics and business has also raised concerns in Washington and European capitals, leading to regulations that block foreign investment in certain sectors and companies.
China hasn’t struggled with economic growth like Japan, but a prolonged collapse in the real estate market has shredded consumer and investor confidence. Lingering problems in China’s economy are exacerbating the weakness of the country’s currency, the renminbi.
Much of the negative sentiment is playing out in Hong Kong, the public market where global investors traditionally bet on China and its companies. The market took a big hit last year and fell even further in the first three weeks of this year.
The Chinese government intervened this week to try to reverse the decline. On Monday, the country’s No. 2 Premier Li Qiang called on authorities to act more “tougher” and take further steps to “boost market confidence.” His speech sent stocks higher, as did a report in Bloomberg, citing anonymous officials, that authorities were considering a $278 billion market bailout.
And on Wednesday, the central bank, the People’s Bank of China, freed commercial banks to lend, effectively funneling $139 billion into the market by reducing the amount of money banks needed to hold in reserves. Regulators also eased rules on how indebted property developers can repay their loans.
His words and actions pushed the market higher this week, with the Hang Seng Index recording its best day this year for the third time. China’s Shanghai and Shenzhen markets also rebounded, although to a lesser extent.
But many investors say the measures fail to address the larger issue of China’s economic trajectory. They remain disappointed in China’s response to the broader economic downturn and its perceived reluctance to deliver extraordinary economic stimulus, similar to past periods of economic stress. .
“We expect that to continue,” said Daniel Morris, an analyst at BNP Paribas, referring to more serious efforts to support the market. “But I’m not confident that it will happen. To be honest, at the end of last year I thought all the bad news had been factored in, but this year it has fallen even further.”
Economists, financiers and business executives around the world looked to China last year for an economic recovery after the government scrapped its “zero coronavirus” policy and at times punished lockdowns that sent the country into an economic freeze. However, Chinese consumers did not engage in the kind of “revenge spending” seen in other regions after reopening, and the real estate crisis weighed heavily on families, with many putting nearly three-quarters of their savings into real estate. I’m putting in a lot of money.
“There’s not a lot of confidence domestically and the government isn’t really interested in supporting the economy,” said Louis Cuis, chief Asia economist at S&P Global Ratings. “The market somehow expected more and is becoming increasingly disappointed and disillusioned.”
And among the disillusioned are some Chinese investors who are moving money into exchange-traded funds (ETFs) that track Japanese stocks. At times, the prices of these funds can trade far above the value of the underlying assets, a sign of investor enthusiasm for their investments.