The Nikkei 225 index set a new record on February 22, surpassing its peak reached 35 years ago. Meanwhile, Japan’s latest economic data showed two straight quarters of GDP contraction. What’s behind this equity-economy contradiction? In this article, we unpack the phenomenon by answering four big questions:

  • Why is the Nikkei 225 soaring?
  • Why has Japanese GDP been declining?
  • Why might the BOJ still end negative interest rates even when the economy is weak?
  • And how will that impact the Japanese yen and equity market?

Why is the Nikkei 225 soaring?

1. Strong corporate earnings on top of a weak yen with increased share of corporate revenue coming from overseas operations. Japanese firms are seeing better-than-expected earnings, mainly driven by a higher share of revenue coming from their overseas operations, which benefits from a weak yen. For example, the proportion of overseas production in the country’s manufacturing industry has risen from 17% in the 1990s to around 40.7% today. Conversion of foreign currency earnings back to the weaker JPY boosts corporate profits, fueling record gains in corporate earnings. For instance, Toyota, with over 80% of its revenue coming from overseas, posted record high earnings for 2023 Q4 earnings and saw its shares rising by over 33% since the beginning of this year.


2. Corporate share buybacks and foreign investors pouring funds into Japanese equities. Last year, as part of its corporate governance reforms, the Tokyo Stock Exchange (TSE) announced the request of listed companies to "implement management that is conscious of the cost of capital and stock price.” Since then, many Japanese companies have ramped up stock buybacks to comply with the regulations, resulting in an average weekly inflow of 90 billion yen into the Japanese stock market since last year, a historical high. Meanwhile, the combination of low interest rates, weak yen, and positive news like TSMC’s announcement to build a second plant in Kumamoto has continued to attract foreign investors like Warren Buffet to pile funds into the Japanese stock market, which has also been seeing an average weekly inflow of around 90 billion yen of foreign investment since last year.


3. Individual stock performance also boosted the Nikkei. SoftBank is among the top gainers that contributed to Nikkei's recent bull run. The fourth largest constituent of the Nikkei 225 by market cap, SoftBank’s shares have risen over 45% YTD, propelled by stronger-than-expected earnings results of Arm, as SoftBank holds about 90% of the chip designer’s shares outstanding.

Why has Japanese GDP been declining?

On the GDP front, the picture is starkly different. Japan's Q4 GDP annual growth rate unexpectedly dropped to 1.0% (prev: 1.7%), representing an annualized contraction of -0.4%, which followed a -2.9% contraction in the July-September quarter, marking two straight quarters of negative growth.

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