Japanese stocks ride the tide: A sign of return?

Japan's main stock markets indexes are now at record highs since the asset bubble burst in 1990. Japan's benchmark Topix index and the Nikkei 225 (N225), which tracks Japanese blue chips, are up nearly 14% and 17%, respectively, in the year to May 24. Those gains have outpaced the S&P 500 in the U.S. and the benchmark Stoxx 600 in Europe, which are up 8% over the same period.

Jeffrey Atherton, investment manager at Man GLG, a hedge fund giant Man Group subsidiary, said: "In my 33 years of investing career, the current market conditions seem to be more optimistic than at any other time." Warren Buffett revealed to Nikkei in April that his core investment firm, Berkshire Hathaway, plans to increase its investments in five Japanese companies.

Relatively low valuations - Half of the companies listed on the Tokyo Stock Exchange have price-to-book ratios below 1, compared to only 3% of companies in the S&P 500 Index. This low ratio shows that These stocks are very attractively priced. Additionally, there are many companies paying record dividends in 2022, while massive share buybacks have also helped boost stock prices.

Inflation is back - growing fast. Consumer prices in Japan rose at the fastest pace in 41 years in January after decades of deflation. While inflation has since slowed, it remains well above the BOJ's 2 percent target.

Currency Weakness - The Bank of Japan has maintained its key interest rate despite U.S. and European rate hikes. This divergence in monetary policy has depreciated the yen relative to most other major currencies: the yen is down nearly 9% from a year ago, This makes Japanese exports more competitive.