The Japanese Resurgence – Why the Nikkei is Suddenly Outperforming the S&P 500 After a 30-Year Slumber

Every finance professor used Japan’s stock market as a cautionary tale for decades. The chart was nearly embarrassing. A line that dizzily ascended into 1989, plummeted off a precipice, and then drifted sideways for so long that it started to seem like an enduring aspect of the world economy. Before the Nikkei ever crawled back to where their parents had left it, a whole generation of Japanese savers retired.

Finally, that long sleep is over. Furthermore, most Western investors don’t seem to realize how long it has been over.

To be honest, some Tokyo strategists describe the Nikkei 225’s recent success with a kind of cautious disbelief. Earlier this month, it briefly surged above 58,000 before retreating from the customary chip-stock profit-taking. The image is striking when you take a step back from the everyday cacophony. Over the past year, Japanese stocks have surpassed the S&P 500. In some ways, they’ve surpassed it in the last five years. And they did it while AI, Nvidia, and the same few mega-cap companies that everyone already owns were busy controlling the American narrative.

Speaking with those who actually manage money for a living, it seems that many professionals were taken aback by this rally. The value trap was supposed to be Japan. The market that was always inexpensive. A few years ago, Buffett’s unexpected wager on the Japanese trading houses appeared to be an oddity, like an elderly man searching through an abandoned attic. It now has a different appearance.

There are several things that have changed. Seldom is it. For Japanese tourists traveling overseas, the yen’s decline was excruciating, but for exporters whose profits abruptly turned into something more favorable, it was a silent gift. Companies were forced to take their own balance sheets seriously by corporate governance reforms, which are the kind of dry, technocratic stuff that usually puts foreign fund managers to sleep. Unwound cross-shareholdings. Where previously there had only been lifetime employment, loyalty, and money piling up pointlessly in corporate vaults, buybacks emerged.

The political narrative has also been beneficial. An overhang of uncertainty that had been pricing into the market for months was eliminated by a cleaner election result earlier this year. Foreign capital, which has a tendency to be wary of Tokyo, began to reappear. Not in a trickle. weekly inflows that cause local brokers to worry about whiplash.

When you stroll through Marunouchi during lunch, the salarymen’s appearance remains unchanged. Convenience store coffee is still very inexpensive. The streets don’t seem to be in a state of euphoria, and there aren’t any taxi drivers giving stock tips like in the old bubble stories. More than anything else, this is what leads some observers to believe that the rally is still going strong. It doesn’t seem like 1989 anymore. It seems like a market that has been forgotten for so long that even its players don’t fully believe in the profits.

Whether this can go on is still up in the air. The chip cycle is a moody beast in and of itself, and the Nikkei is heavily biased toward semiconductors. Earnings translations would be negatively impacted almost immediately by a stronger yen. Additionally, the quiet, grinding issue of Japanese demographics hasn’t disappeared.

However, foreign investors continue to discuss the nation whose market sacrificed a whole generation of profits. It’s difficult to avoid thinking that the extended sleep wasn’t actually a death as you watch this play out. Just a very, very long pause.