While Chinese markets stumble, Japan soars towards record levels

There is a shift underway in Asia that is resonating in global financial markets.

Japan's stock market, overlooked by investors for decades, is making a furious comeback. The benchmark Nikkei 225 index is inching closer to the record high set on December 29, 1989, which effectively marked the peak of Japan's economic ascendancy before a collapse that led to decades of low growth.

China, long a market impossible to ignore, has entered a downward spiral. Stocks in China recently hit lows not seen since the 2015 rout, and Hong Kong's Hang Seng index was the world's worst-performing major market last year. Stock prices only halted their slide when Beijing recently signaled its intention to intervene, but remain well below previous highs.

This year should be a tumultuous one for global markets, with unpredictable swings as economic developments diverge and voters in more than 50 countries head to the polls. But one unforeseen reversal is already underway: a change in investor perception of China and Japan.

Japanese Prime Minister Fumio Kishida took advantage of the shift, addressing more than 3,000 global financiers gathered in Hong Kong this week for a conference sponsored by Goldman Sachs. It was the first time a Japanese Prime Minister delivered a keynote address at the event.

“Now Japan has a golden opportunity to fully overcome the low economic growth and deflationary environment that has persisted for a quarter of a century,” Kishida said in a video recording. His government, he said, would “demonstrate to all of you Japan's transition to a new economic phase by mobilizing all policy instruments.”

It's the kind of message Japan has been amplifying for a decade, and now investors want to hear more of it. Foreign investors pumped $2.6 billion into the Japanese stock market last week, up from another $6.5 billion the week before, data from the Japan Exchange Group showed. That's a marked shift from the roughly $3.6 billion snatched in December.

All that money has pushed the Nikkei 225 in Tokyo up about 8 percent this month. The market has risen by more than 30 percent in the past twelve months. This week, Toyota rose to a record market value for a Japanese company, about $330 billion, surpassing the target set in 1987 by telecom conglomerate NTT.

A combination of factors have contributed to Japan's recent success. A weak yen has made stocks look cheap to foreign investors, and it has been a boon for exporters and multinationals in Japan that make their profits abroad. Major corporate reforms have given shareholders more rights, allowing them to call for changes in strategy and management. Unlike inflation in other parts of the world, rising inflation in Japan has been a sign that things are moving in the right direction, after decades of falling prices and sluggish economic growth dampened the appetite of consumers and businesses to spend money. tempered.

And there is another factor: geopolitics. The longer-term prospects for Japan, the third-largest economy, look good as parts of the world put pressure on the second-largest economy, China.

“One of the best things that can happen to Japan is China,” said Seth Fischer, the founder and chief investment officer of Oasis Management, a hedge fund based in Hong Kong.

“Japan has been working for a decade to create a more productive business environment and a better place to work as an equity investor by consistently seeking to improve value,” Mr. Fischer said. “People don't believe the same 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. (The other was to take advantage of high-flying US tech stocks.)

China's ruling Communist Party has sought to integrate itself into the business community in recent years, raising concerns among investors that politics often trump profits for many Chinese corporate giants. The blurring of politics and business has also raised concerns in Washington and European capitals, leading to regulations that have prevented foreign investment in certain sectors and companies.

China has not struggled for economic growth like Japan, but a prolonged collapse in the real estate market has shaken consumer and investor confidence. Ongoing problems with the Chinese economy have exacerbated the weakness of the Chinese currency, the yuan.

Much of the negative sentiment has been in Hong Kong, an open market where global investors traditionally place their bets on China and its companies. Last year the market was ravaged and in the first three weeks of this year the market fell further.

Beijing intervened this week to try to reverse the sell-off. On Monday, the country's No. 2 official, Premier Li Qiang, called on authorities to be “more forceful” and take more measures to “increase market confidence.” His speech sent stocks soaring, as did a Bloomberg report citing unnamed officials that authorities were considering a $278 billion market rescue.

Then on Wednesday the central bank, the People's Bank of China, gave commercial banks the freedom to make more loans, essentially pumping $139 billion into the market by lowering the amount of money banks must keep in reserve. Regulators also relaxed rules on how indebted real estate developers could repay loans.

The words and actions pushed the market higher this week, with the Hang Seng Index posting three of its best days this year. The Chinese markets in Shanghai and Shenzhen also rebounded, but not as strongly.

But many investors say the measures have failed to address a much bigger problem: China's economic trajectory. They remain disappointed with China's response to the broader economic slump and perceived reluctance to implement spectacular stimulus measures as it has done in previous periods of economic stress.

“We hope this will still happen,” said Daniel Morris, an analyst at BNP Paribas, referring to a more substantial effort to support markets. “But we are not confident that will happen. To be honest, I thought that all the bad news would have been priced in by the end of last year, and yet we have fallen further this year.”

Economists, financiers and business leaders around the world looked to China for an economic recovery last year after the government scrapped its “zero Covid” policies and punished lockdowns that sometimes left the country in an economic freeze. But Chinese consumers did not engage in the kind of 'revenge spending' seen elsewhere after the reopening, and a real estate crisis has weighed heavily on families, many of whom have nearly three-quarters of their savings tied up in real estate.

“There is not a lot of confidence at home, and then you have a government that is not very interested in supporting the economy,” said Louis Kuijs, chief Asia economist at S&P Global Ratings. “The markets somehow expected much more and are becoming increasingly disappointed and disillusioned.”

And among the disillusioned are some Chinese investors, who have poured money into exchange-traded funds that track Japanese stocks. At times, the prices of these funds have traded well above the value of their underlying assets, a sign of investors' enthusiasm for investing.