Nikkei rally takes it past 42,000, back from a 35-year bear market

The Japanese Nikkei hit 42,000 for the first time, powered by a rally in tech shares and after machinery orders rose more than expected.

The current rally has seen the Nikkei more than double over the past four years from COVID lows of 19,000.

But crucially, over the past few months, the Nikkei has gone past 39,000, a top last seen in 1989 when Japan saw a 24-year bull market starting in 1965, and after which shares entered a 35-year bear market.

Japan’s bull market in the 70s and 80s was powered by its rapid rise as an electronics and automotive exporting powerhouse but it saw valuations become extremely stretched – at its peak, the index was valued at a price-to-earnings ratio of 60.

The 35-year bear market saw valuations often trade at single digits amid concerns over an ageing country that battled anemic deflation and struggling demand.

Currently, the Nikkei trades at a P/E ratio of 17, close to its long-term average.

Over the past three years, companies have, on average, grown revenues at a clip of 7.7% while profit has climbed 9.3% on an annualised basis.

While the current rally has also been powered by a cheap yen and corporate governance reforms, in Japan, much like on Wall Street, investors have taken a fancy to tech shares. Tokyo Electron has surged 90% over the past year while Advantest Corp is up 35%.

Some experts, such as Morgan Stanley, have hoped that a “revitalised Japan” powered by its banking and technology sectors makes Japan an interesting opportunity again.

Yet others continue to remain wary amid structural challenges – earlier this year, the country fell into a recession, ceding its spot as the world’s third-largest economy to Germany.

But for now, the stock market party continues.