Japanese stocks have been hitting record highs. But the rally may be ‘fragile’
Aerial view of Mount Fuji, Tokyo Tower and modern skyscrapers in Tokyo on a sunny day.
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Japanese stocks are hitting record highs on renewed confidence in domestic policy and the ruling administration’s economic agenda, but experts warn there is a disconnect between the stock market and economic fundamentals.
of japan Nikkei 225 It broke many firsts in recent days, surpassing 56,000, then 57,000, approaching 58,000, driven by the so-called “Takaichi trade” following Prime Minister Sanae Takaichi’s landslide victory in the Lower House.
On the Japanese stock exchange, which was closed for a holiday on Wednesday, the Nikkei rose as high as 57,960 on Tuesday. The index is up about 15% so far this year.
Market observers said political optimism had become the mainstay of the rally, fueled by Takaichi’s strong electoral mandate. Stock investors welcomed the prospect of higher spending, tax cuts and a more ambitious economic agenda.
But analysts caution that clarity on how these policies will be financed may trump excitement, and Japan’s current stock market fundamentals look increasingly fragile: vulnerable to currency movements, global shocks and the widening gap between prices and fundamentals.
Richard Harris, chief executive of investment management firm Port Shelter, said it was difficult to attribute the market’s current gains to economic strength alone: ”It’s not really driven by fundamentals. If you look at how the currency is moving, how the economy is doing, there’s nothing really strong that justifies the move in the market.”
On a quarter-to-quarter basis, japan economy Government data published in November showed it contracted by 0.4% in the three months to September, the first contraction in six quarters. It contracted by 1.8 percent on an annual basis.
The country is the most indebted country in the world, with a debt/GDP ratio of almost 230% by 2025. International Monetary Fund It showed that increased fiscal spending carries the risk of further debt accumulation.
The government approved a fiscal stimulus package of over $135 billion in November that guaranteed increased borrowing.
Sentiment, liquidity and narrative are the dominant forces driving the market, Harris said. “We’ve seen this in other markets as well,” he said, adding that Japan is not unique in breaking records amid global enthusiasm for stocks and AI-related investments.
Artificial intelligence and yen uncertainty
Stefan Angrick, senior economist at Moody’s, reiterated that the AI boom is driving stocks higher around the world, and this is also being seen in Japanese stocks.
“The current situation probably looks a little fragile given that valuations are driven by the global equity rally,” Angrick told CNBC.
Japan’s heavy exposure to global manufacturing and capital goods has made it a major beneficiary of the development of artificial intelligence. But that connection also makes the market sensitive to any cooling in global tech enthusiasm or shifts in the currency, which has quietly done much of the heavy lifting, he said.
This sensitivity has become even more evident in recent months; Concerns about the artificial intelligence bubble have sent volatility in the market, including Japanese stocks. Last week, the software industry faced a sell-off after AI company Anthropic launched new AI tools designed to manage complex professional workflows that many software companies offer as core services.
Angrick added that it is also the yen that makes the current valuation level a bit fragile. The yen has weakened considerably in the past year; This tends to be positive for stocks in Japan, given that a large portion of the market consists of export-dependent manufacturers.
A weak yen is boosting earnings and inflating stock valuations, but this may fade over time. “The yen is trading too far from fundamentals. It’s fundamentally too weak. Unreasonably weak,” he said.
Data from LSEG showed that the Japanese yen has weakened by about 3.67% against the dollar over the past six months.
Japan signaled that it may intervene if the decline in the yen continues. Japanese Finance Minister Satsuki Katayama He even conveyed his concerns to US Treasury Secretary Scott Bessent about the “unilateral devaluation” of the yen.
Aberdeen Investments expects the yen to appreciate with a gradual increase in real rates as inflation slows more slowly than currently appreciated.
Angrick also predicts that the currency will strengthen. “The expectation is that in the medium term we will see the yen appreciate and equity valuations fall a little bit,” he said, adding that currency normalization “could take a pretty big chunk out of where equities are now.”
But that doesn’t mean Japan’s stock market rally doesn’t have legs.
Experts stated that the structural reforms made in recent years, especially in corporate governance, capital efficiency and shareholder returns, have provided permanent growth. Companies have stepped up share buybacks, resolved cross-shareholdings and focused more aggressively on return on equity. Promoted by Tokyo Stock Exchange.
Some asset managers argue that Japan’s corporate fundamentals remain generally supportive, but only if expectations are met.
Union Bancaire Privée portfolio manager Zuhair Khan said the rally was “real” as a strong and stable government reassured the market, but warned prices assumed an advance that had not yet materialised.
“The market is already pricing in some improvements that haven’t happened yet,” he said, pointing to expectations of asset sales, buybacks and margin recovery. This leaves little room for disappointment.
“If the pace of recovery slows down, then there is downside risk,” Khan said.
