A change is underway in Asia that is being echoed in global financial markets.
Japan’s stock market, ignored by investors for decades, is making a strong comeback. The benchmark Nikkei 225 index is approaching a record set on Dec. 29, 1989, which effectively marked the peak of Japan’s economic rise before a collapse that led to decades of low growth.
China, which was a market that could not be ignored for a long time, is in a downward spiral. Stocks in China recently hit lows not seen since a collapse in 2015, and Hong Kong’s Hang Seng index was the worst-performing major market in the world last year. Shares halted their decline only after Beijing recently signaled its intention to intervene but they remain well below previous highs.
It was going to be a turbulent year for global markets, with unexpected ups and downs as economic fortunes diverged and voters in more than 50 countries went to the polls. But an unexpected reversal is already underway: a shift in sentiment among investors about China and Japan.
With this change in mind, Japan’s Prime Minister Fumio Kishida this week addressed more than 3,000 global financiers gathered in Hong Kong for a conference sponsored by Goldman Sachs. This was the first time that a Japanese Prime Minister had given the keynote address at the event.
“Japan now has a golden opportunity to fully recover from the environment of low economic growth and deflation that has persisted for a quarter of a century,” Mr. Kishida said in a video recording. His government, he said, “will mobilize all policy instruments to demonstrate to all of you Japan’s transition to a new economic stage.”
It’s the kind of message Japan has been honing for a decade and now investors want to hear more of. Foreign investors poured $2.6 billion into the Japanese stock market last week, up from $6.5 billion the previous week, according to Japan Exchange Group data. This is a big change from the approximately $3.6 billion withdrawn in December.
All that money has driven Tokyo’s Nikkei 225 up nearly 8 percent this month. The market is up more than 30 percent in the last 12 months. This week, Toyota reached a record market value for a Japanese company, nearly $330 billion, surpassing the mark set by telecommunications group NTT in 1987.
A combination of factors have contributed to Japan’s recent success. The weaker yen has made stocks cheaper for foreign investors, and that’s a boon for Japan-based exporters and multinationals that make their profits overseas. Significant reforms in the corporate sector have given greater rights to shareholders, enabling them to call for changes in strategy and management. Unlike inflation in other parts of the world, rising inflation in Japan is a sign that things are going in the right direction, as decades of falling prices and sluggish economic growth have reduced the appetite for spending among consumers and companies. .
And there’s an additional factor: geopolitics. Long-term prospects look good for Japan, the third-largest economy, at a time when there is resentment in some parts of the world over China, the second-largest economy.
“One of the best things that has happened to Japan is China,” said Seth Fisher, founder and chief investment officer of Hong Kong-based hedge fund Oasis Management.
“Japan has been working for 10 years on creating a more productive corporate environment and a better place to be an equity investor by trying to continuously improve value,” Mr. Fischer said. “People don’t believe that 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 trading ideas. (Another approach was to load up on high-flying US tech stocks.)
China’s ruling Communist Party has tried to involve itself in the business sector in recent years, prompting investors to worry that politics often overshadows the bottom line for many of China’s corporate titans. The blurring of politics and trade has also raised concerns in Washington and European capitals, leading to rules that have blocked foreign investment in some sectors and companies.
China has not struggled with economic growth like Japan, but a prolonged property market downturn has eroded consumer and investor confidence. Long-running issues with China’s economy have led to increased weakness in the country’s currency, the yuan.
Most of the negative sentiment was reflected in Hong Kong, an open market where global investors traditionally place their bets on China and its companies. The market had fallen last year and has fallen further in the first three weeks of this year.
Beijing intervened this week to try to reverse the selloff. 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 sent shares soaring, as did a Bloomberg report citing unnamed officials that said officials were considering a $278 billion market rescue.
Then on Wednesday, the central bank, the People’s Bank of China, freed up commercial banks to lend more, essentially pumping $139 billion into the market by reducing the amount of money banks are required to keep in reserves. Regulators also relaxed rules on how indebted property developers can repay loans.
Words and actions lifted the markets this week, with the Hang Seng Index posting its three best days this year. China’s Shanghai and Shenzhen markets also rose, although not as much.
But many investors say these measures fail to address a bigger problem: China’s economic momentum. They are disappointed by China’s response to the broader economic slowdown and its perceived reluctance to withdraw cosmetic stimulus, as it has done in previous periods of economic stress.
“We expect that to still happen,” said Daniel Morris, an analyst at BNP Paribas, referring to a more concerted effort to prop up markets. “But we do not believe that will happen. I honestly would have thought that all the bad news at the end of last year would have paid off, and yet we have fallen again this year.
Economists, financiers and corporate executives around the world looked to China for an economic recovery last year after its government scrapped its “zero Covid” policy, at times plunging the country into an economic recession. But Chinese consumers have not engaged in the kind of “revenge spending” seen elsewhere after reopening, and the property crisis has weighed heavily on households, many of whom have spent nearly three-quarters of their savings in real estate. Tied up in the estate.
“There’s not a lot of confidence domestically, and then you have a government that isn’t very interested in supporting the economy,” said Luis Quiz, chief Asia economist at S&P Global Ratings. “The markets somehow expected too much and they are becoming increasingly disappointed and disillusioned.”
And the ranks of the disappointed also include some Chinese investors who are parking money in exchange-traded funds that track Japanese stocks. Sometimes the prices of these funds trade well above the value of their underlying assets, indicating investor enthusiasm for the investment.