As China’s markets stumble, Japan rises toward record

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There’s a shift underway in Asia that’s reverberating through global financial markets.

Japan’s stock market, overlooked by investors for decades, is making a furious comeback. The benchmark Nikkei 225 index is edging closer to the record it set on Dec. 29, 1989, which effectively marked the peak of Japan’s economic ascendancy before a collapse that led to decades of low growth.

China, long an impossible-to-ignore market, has been spiraling downward. Stocks in China recently touched lows not seen since a rout in 2015, and Hong Kong’s Hang Seng Index was the worst-performing major market in the world last year. Stocks stemmed their slide only when Beijing recently signaled its intention to intervene but remain far below previous highs.

This year was set to be a tumultuous one for global markets, with unpredictable swings as economic fortunes diverge and voters in more than 50 countries go to the polls. But there’s one unforeseen reversal already underway: a change in perception among investors about China and Japan.

Seizing on this shift, Japanese Prime Minister Fumio Kishida addressed more than 3,000 global financiers gathered in Hong Kong this week for a conference sponsored by Goldman Sachs. It was the first time a Japanese prime minister had given a keynote address at the event.

“Now Japan has a golden opportunity to completely overcome low economic growth and a deflationary environment that have persisted for a quarter of a century,” Mr. Kishida said in a video recording. His government, he said, would “demonstrate to all of you Japan’s transition to a new economic stage by mobilizing all the policy tools.”

It’s the kind of message that Japan has been honing for a decade, and now investors want to hear more of it. Foreign investors pumped US$2.6-billion into the Japanese stock market last week, adding to US$6.5-billion the week before, according to data from Japan Exchange Group. That is a stark shift from the roughly US$3.6-billion that was yanked out in December.

All that money has sent Tokyo’s Nikkei 225 surging about 8 per cent this month. The market is up more than 30 per cent over the past 12 months. This week, Toyota rose to a record market value for a Japanese company, about US$330-billion, surpassing the mark set in 1987 by the telecom conglomerate NTT.

A combination of factors has contributed to Japan’s recent success. A weak yen has made stocks look cheap to foreign investors, and it has been a boon to exporters and multinationals based in Japan that make their profits overseas. Important reforms to the corporate sector have given shareholders more rights, enabling them to call for changes in strategy and management. Unlike inflation in other parts of the world, rising inflation in Japan has been a sign that things are headed in the right direction, after decades of falling prices and sluggish economic growth dampened appetite among consumers and companies to spend.

And there is one additional factor: geopolitics. The longer-term prospects for Japan, the third-largest economy, are looking good when parts of the world are souring on the second-largest economy, China.

“One of the best things to happen to Japan is China,” said Seth Fischer, the founder and chief investment officer at Oasis Management, a hedge fund based in Hong Kong.

“Japan has for 10 years been working on creating a more productive corporate environment and a better place to be an equity investor through consistently trying to improve value,” Mr. Fischer said. “People don’t believe the same about China.”

In a recent survey of global fund managers by Bank of America, selling Chinese stocks and buying Japanese stocks were two of the three most popular trade ideas. (The other was to load up on highflying U.S. tech stocks.)

China’s ruling Communist Party has sought to insert itself into the business sector in recent years, leaving investors worried that politics often trumps the bottom line for many of China’s corporate titans. The blurring of politics and business has also raised concerns in Washington and in European capitals, leading to regulations that have prevented foreign investments into certain sectors and companies.

China has not struggled for economic growth like Japan, but a protracted property market collapse has shredded consumer and investor confidence. Lingering issues with China’s economy have exacerbated weakness in the country’s currency, the yuan.

Much of the negative sentiment has played out in Hong Kong, an open market where global investors traditionally place their bets on China and its companies. The market was pummeled last year, and it slipped further over the first three weeks of this year.

Beijing intervened last week to try to reverse the sell-off. On Monday, the country’s No. 2 official, Premier Li Qiang, called on authorities to be more “forceful” and take more measures to “improve market confidence.” His speech lifted stocks, as did a report from Bloomberg, citing unnamed officials, that the authorities were contemplating a US$278-billion market rescue.

Then on Wednesday, the central bank, the People’s Bank of China, freed commercial banks to do more lending, essentially pumping US$139-billion into the market by lowering the amount of money banks are required to keep in reserve. Regulators also loosened rules for how indebted property developers could pay back loans.

The words and actions propelled the market higher, with the Hang Seng Index posting three of its best days this year. China’s Shanghai and Shenzhen markets also bounced, though not by as much.

But many investors say the measures have failed to address a much bigger problem: China’s economic trajectory. They remain disappointed with China’s response to its broader economic slump and its perceived reluctance to pull off a showstopping stimulus, as it did in previous periods of economic stress.

The Hang Seng Index fell 1.6 per cent Friday, reversing some of the week’s gain.

“We hope it will still happen,” said Daniel Morris, an analyst at BNP Paribas, referring to a more substantial effort to prop up markets. “But we don’t have confidence that it will. I honestly would have thought that at the end of last year all the bad news had to be priced in, and yet we have fallen further again this year.”

Economists, financiers and corporate executives around the world looked to China last year for an economic rebound after its government scrapped its “zero-COVID” policy, punishing lockdowns that at times put the country into an economic freeze. But Chinese consumers didn’t participate in the kind of “revenge spending” seen elsewhere after reopenings, and a property crisis has weighed on families, many of whom have nearly three-quarters of their savings tied up in real estate.

“There is not much confidence domestically, and then you have a government that isn’t very interested in supporting the economy,” said Louis Kuijs, chief Asia economist at S&P Global Ratings. “Markets somehow had expected much more and are becoming increasingly disappointed and disillusioned.”

And the ranks of the disillusioned include some Chinese investors, who have been moving money into exchange-traded funds that track Japanese stocks. At times these funds’ prices have traded far above the value of their underlying assets, a sign of investors’ enthusiasm.

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