Moneycontrol Pro Panorama | Japan's day in the sun

Japan had the largest foreign investor net equity inflows in April with $15 billion, followed by India with $1.92 billion.

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The Japanese markets are a quintessential case study of the devastating effect of an asset bubble. It has taken 33 years for the market to cross the levels it had last seen in early 1990. The Nikkei 225 crashed from a high of 38,957 in January 1990 to a low of 21,902 in December 1990, a loss of more than 43 percent within a year. The index touched a low of 14,338 on August 19, 1992.

The markets crossed the 31,000 mark, which was last seen 33 years ago. This peak is still 25 percent lower than the all-time high level seen during the peak of the bubble.

Compare this to the different asset bubbles seen in the Indian market where it took seven years for the Sensex to cross the highs made during the peak of the Harshad Mehta rally (1992-99), four years to cross the dotcom bubble (2000-04), six years to cross the global financial meltdown of (2008-14) and 11 months to cross the pandemic peak.

For the Japanese, it is 33 years and they are still some distance away from their 1990 peak. This indicates the size of the 1990 bubble which was perhaps the largest seen in financial markets as no other developed market has taken so long to recover.

Yet, there is reason to celebrate Nikkei 225 crossing a 33-year high. Fund managers say interest in Japanese stocks is at its highest in nearly a decade. After three years of investment outflows, foreign investors are coming back with a vengeance.

Japan had the largest foreign investor net equity inflows in April with $15 billion, followed by India with $1.92 billion.

So, what has suddenly changed in Japan? At over 20 percent returns for the year, Japan is the best-performing Asian stock exchange and just behind the technology-heavy Nasdaq.

Valuations of Japanese stocks are cheap despite the rise. Almost half of the index members are trading below book, compared with just 5 percent of the S&P 500 Index, according to data compiled by Bloomberg.

Loose monetary policy has finally helped translate into higher inflation. My colleague Manas Chakravarty points out that Japan has charted its own monetary policy course, with the result that it is now seeing the strongest rise in private sector activity.

To top it all is the Warren Buffett effect. Last month, Buffett said he owned more stocks in Japan than in any other country, besides the US. He bought stakes in each of Japan's five largest trading houses nearly three years ago and recently increased his holding.

His confidence in the Japanese economy has had an impact on corporate Japan. Conservative Japanese companies used to sit on piles of cash, but now they are not shying away from announcing share buybacks, a signature Warren Buffett model of increasing shareholder value.

Share buybacks in Japan hit a record in fiscal 2022, with investors expecting more companies to follow suit in the current year.

According to Societe Generale, share buybacks for the fiscal year that ended March totalled 8.5 trillion yen ($62.9 billion), with companies announcing 3.5 trillion yen of those in the final quarter. More companies are following the leaders in announcing share buybacks.

With an improving economy and companies focusing on improving their return on equity, it is little surprise that the country is trading at a 33-year high and is all set to challenge the 1990 peak in the next few years.

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Technical Picks: Hindalco Industries, DLF, Castor seed, Asian Paints and ICICI Bank (These are published every trading day before markets open and can be read on the app). 

Shishir AsthanaMoneycontrol Pro