Japan: Equities are trading as high as they were last in 1990, despite deflation

Bank of Japan.

Bank of Japan.

KAZUHIRO NOGI / AFP via Getty Images

The majority of those interested in the stock market in this country probably know pretty well at what level the Dax is quoted. The US indices are also regularly tracked because they also set the pace for developments in Germany. But it is also worth taking a look at Asia. Especially now, because the Japanese leading index Nikkei 225 is currently trading at around 30,150 points and thus as high as it was last in 1990.

The economy in Japan has had a difficult time since 1990. After speculative bubbles burst in stocks and real estate, the economy fell into deflation. Consumers stopped buying in the hope that prices would keep falling. A spiral that is difficult to break and is therefore considered an economic horror scenario.

One area in particular was troubling the country, says economist Rudolf Besch from Deka-Bank in an interview with “The main problem in Japan was the decade-long drop in property prices. In 2018, 2019 the area bottomed out, which now gives hope that inflation will pick up – albeit at a low level – in the coming years. ”

Bank of Japan is the country’s largest shareholder

That would be an important turning point in the economic development of Japan – but not yet decisive for the high prices on the stock markets. There is primarily another reason for this. “The central bank is the decisive factor for the stock market in Japan,” says economist Besch. “Since the Bank of Japan has been buying shares, the market has been comparatively stable, even in times of crisis.”

The Bank of Japan (BoJ) has been buying shares in the form of ETFs since 2010 and is using this approach as a strategy in the fight against deflation. In the corona crash in March 2020, the central bank doubled its share purchases from six to twelve trillion yen (95 billion euros) per year. This made it the largest shareholder in the country.

But impetus also come from the economy. For example, while the economy in Germany almost stagnated in the fourth quarter of 2020, in Japan it grew by three percent compared to the third quarter. This is also due to a different way of dealing with the corona pandemic. “Like other Asian countries, Japan dealt very rigorously with the corona virus,” says Rudolf Bensch. “The experience with MERS or SARS also helped, which is why the population is sensitized to such an infection process and adheres to hygiene measures in a very disciplined manner.”

Only 0.3 percent of the Japanese population is infected with corona

Just 0.3 percent of the Japanese population have contracted the virus, as Deka writes in a research article. In addition to the protective measures of the population, the state also intervenes quickly. As in China, New Zealand or Australia, the corresponding regions are sealed off with the first slight increase in the number of infections. Because of the low numbers, there are no vaccinations yet.

The lower infection rate is currently playing into the cards of Japan for the economy. “Japan now has a certain lead. While the economy in Europe and the USA has to come out of the crisis again, Japan is already growing and is one step further. However, Japanese companies are also dependent on international trade, ”analyzes economist Besch. Due to the zero interest rate policy that has been going on for decades, the Japanese currency is not attractive to investors. In contrast, Japanese export companies are benefiting significantly from the low yen.

Japan’s economy is unstable

But the last problem for Japan was that successful quarters were repeatedly interrupted by bad ones. “Japan’s economy hardly manages to grow steadily over a longer period of time. Usually there is one quarter a year with a decline and about every year and a half Japan falls into recession, ”says Besch from Deka-Bank. “But it is possible that Japan could show more stability here in the future.”

To be able to show at least a black zero in weak quarters would be an important sign of stability for international investors. Experts and economist Rudolf Besch believe that the stock market will remain strong even without this stability. “As long as the Bank of Japan continues to buy stocks, the stock market should continue to benefit from them,” he says. There is no end in sight to this strategy, and it is difficult to imagine. A sale of the acquired papers would put the market under pressure because of the large number of shares.


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