After 34 years, returning to a high point, the Japanese stock market has long been a case of "the same place, different people."

On February 22nd, Thursday, as Japan gradually emerges from the "Lost Decades", global investors are pouring funds into the Japanese market, propelling the Nikkei 225 index to surpass the historical high point set 34 years ago.

The Nikkei 225 index closed at 39,098.68 points, breaking the intraday high of 38,957.44 set at the end of the bubble economy period in 1989, and exceeding the historical closing high of 38,915 points.

Following Nvidia's release of better-than-expected earnings report, the strong performance of Japanese tech and semiconductor stocks drove the Nikkei 225 index to soar. Year-to-date, the Nikkei 225 index has surged over 16%, outperforming most other major markets, with a staggering 28% increase for the entire previous year.

This historic rebound signifies the rebirth of the Japanese stock market. At the peak of the bubble economy in 1989, the Japanese stock market rose so rapidly that there was only one way to go - down.

Since last year, the "Stock God" Buffett has increased holdings in Japan's five major trading companies, attracting a large influx of foreign capital into the Japanese stock market, fueling the rise of the Nikkei 225 index. Foreign capital has become a major driving force behind the rebound of Japanese stocks, with the foreign ownership ratio increasing from less than 5% in 1989 to 30% currently.

Reaching the same high point, the past glory is no more

Although Japanese stocks have returned to their previous high point, the former glory of the Japanese economy is no longer present. In 1989, the market was bullish on Japanese stocks, but today, the Japanese economy has not completely escaped the deflation quagmire.

In the 1980s, Tokyo was celebrating a glorious decade, with the Japanese economy growing at an average of 4% annually, driven by soaring stock and real estate prices.

However, by 1989, the Bank of Japan began to raise interest rates, leading to a sharp drop in asset prices. Financial institutions and real estate developers struggled with bad loans, triggering a banking crisis. By 1999, Japan's inflation rate was below zero, and the Japanese economy entered a long period of stagnation in the 2000s, with an average growth rate of only 0.7%.

Today, the Japanese economy is at a turning point. The Bank of Japan is preparing to gradually exit its ultra-loose monetary policy as early as this spring, with more companies raising prices and breaking the wage stagnation situation.

However, risks still exist in the Japanese economy, with two consecutive quarters of economic contraction, weak household consumption, and not yet fully recovering from deflation. Japan has not officially announced its exit from deflation and remains the only country in the world to implement negative interest rates.

The Japanese stock market has changed drastically over the past thirty years

In the past three decades, the Japanese stock market has undergone significant changes, and the present is different from the past.

In 1989, among the top 50 companies in global market capitalization, Japan had 32 companies, especially in the banking sector. Today, only Toyota Motor Corporation is the sole Japanese company in the global top 50. In the late 1980s, due to asset price inflation, banks became the real heavyweights in the Japanese market. Today's market is more balanced and diversified, with major companies including Sony, leisure clothing chain operator Xunxiao, and semiconductor equipment manufacturer Tokyo Electron ranking fifth.

In terms of profitability, Japanese companies have emerged from a period of low growth with healthy balance sheets. According to data from the Japanese Ministry of Finance, from the 1989 fiscal year to the 2022 fiscal year, the net profit generated by non-financial companies in Japan has more than quadrupled, reaching ¥74 trillion, while dividends paid to shareholders during the same period have surged eightfold to ¥32 trillion.

However, decades of deflation and economic stagnation have also weakened corporate investment interest, leaving Japanese companies with a massive cash pile of ¥343 trillion.

In 1989, six of the top 10 richest people in the world were Japanese. Now, only three Japanese individuals are among the top 100 billionaires globally, with Xunxiao founder Yanai Masahiro and his family ranking 30th with a net worth of $40 billion.

Moreover, about half of the major listed companies on the Tokyo Stock Exchange are undervalued, with a price-to-book ratio below 1, prompting the head of the Japan Exchange Group to create a list of companies trading below book value, forcing them to offer higher stock prices.

Will the Japanese stock market rally continue?

Even after this year's rebound, many Japanese stocks are still trading at depressed levels, with 37% of the Nikkei index components trading below their book value.

This means that investors could make more money by selling off all of a company's assets than by continuing to operate it, which is essentially a vote of no confidence in the management but also indicates that there is potential for upside if the company is run properly.

In contrast, only 3% of stocks in the S&P 500 index are trading below book value. In the STOXX 600 index in Europe, only one-fifth of stocks fall into this category. Japan's current undervaluation starkly contrasts with the extreme asset prices of 1989.

Therefore, some fund managers now believe that the Nikkei 225 index still has the potential to rise further, as Richard Kaye, portfolio manager at Comgest Asset Management, points out:

I believe the Nikkei index is likely to rise to around 42,000 points, returning to its previous historical high, which will have a significant positive psychological impact on Japanese investors.