Japanese Shares Enjoy Biggest One-Day Rally
Shares listed on Tokyo’s stock exchange have seen their biggest rise since the country’s financial crisis began, with a 7.7 per cent jump. The increase followed a 2.4 per cent drop in the Nikkei 225 index a day before, reversing gains made since the start of the year.
The jump in values had analysts scratching their heads, as there appeared to be no obvious stimulus for the move. The most probable reason for it is the prospect of further stimulus for the country’s economy. This and the increased consumer confidence surrounding the economy are positive changes for Japan and look likely to have the central bank back on track to achieve its two-per-cent inflation target. Reaching that target has been a key plank of Prime Minister Abe’s economic reforms.
Deflation and Downrating
Japan has struggled with its inflation targets and has been fighting deflation for almost 20 years, with near-zero interest rates and high levels of quantitative easing. Following the impact of an increase in sales tax last year, its inflation has fallen back below target. Despite the market confidence, credit rating agency Standard and Poor has downgraded Japan’s sovereign debt rating from AA- to A+, casting doubt on the government’s economic plans. This has led some economists to suggest that the country will need to come up with a revised package of financial reforms.
Despite the recent recovery in the global economy generally, Japan has suffered in part from the slowing down of China’s growth. China remains a major trading partner for Japan, but Beijing’s growth this year is expected to be less than the government’s predicted seven per cent.
The Mighty Fallen
All of this is a long way from the Japanese boom of the 1980s, which saw share and property prices soar to an all-time high in 1989. This, of course, was the prelude to a spectacular crash which the country is still recovering from. The crash resulted in the 1990s and 2000s being seen as ‘lost decades’, with unprofitable companies being propped up by government bailouts. At the very bottom of the curve in 2004, Tokyo residential property was worth only about 10 per cent of its late ’80s peak.
While Japan has struggled, other countries in the region, notably South Korea and of course China, have been busy claiming a share of markets such as cars and electronics that major Japanese companies once dominated.
Is this jump in share values the beginning of a sustained recovery? It’s too early to tell, but it’s interesting to note that on the same day as Tokyo’s 7.7 per cent rise, China’s main index, the Shanghai Composite, showed a gain of 2.29 per cent, while Hong Kong’s Hang Seng added 4.1 per cent – possibly an indication of more confidence across the Far East region.
Mr Abe has promised to cut 3.3 points off Japan’s 35 per cent rate of corporation tax over the next year, which should help the country’s businesses. He has also made a promise to go beyond that if possible, which may also have boosted confidence in the markets.