What’s Behind Nikkei 225’s 33-Year High?

Whereas the markets saw mixed trading on Wednesday, as investors and traders alike grappled with the uncertainties emerging from the US debt ceiling crisis among other economic woes, in the Asian continent, the Nikkei 225 (Japan 225), one of Japan’s leading stock indices, rallied to its highest level in 33 years. What is the Nikkei 225 exactly and why has it soared in spite of the economic uncertainties and apprehensions? Here’s what you need to know about the Asian market’s recent trajectory:

What Is the Nikkei 225?

In short, the Nikkei 225 is a stock market index that tracks 225 stocks from the Tokyo Stock Exchange’s Prime Market. It is also considered by many to be the leading indicator of Japanese stocks and, as such, may reveal valuable insight into the state of the Asian economy, in general, and Japanese economic growth in particular. 

This leading index ended Wednesday’s trading day with a rise of 0.8%, hence hitting a 33-year high and as of the time of the writing, the index is still on a positive uptrend as it gained 1.67%.

Is Japan's GDP behind Nikkei 225's growth?

Many attribute yesterday’s gains to the recent Japanese GDP release in which Japan beat estimates. Wednesday’s GDP release, which measures a country’s total market value of goods and services produced within its border, showed that the world’s third-biggest economy exceeded expectations in Q1 2023 and grew above estimates.

Whereas expectations for the first quarter came in at 1.1%, the data showed that Japan’s GDP grew by 1.6% on an annualized basis. The numbers revealed that the Japanese economy has certainly recovered from its COVID lockdowns phase, after reopening its borders to tourists back in October. Accordingly, this healthy momentum was partially attributed to about five million tourists that visited Japan in the first three months of the year, thus boosting its economy. 

Looking at yesterday’s Japanese data, one analyst noted that “the economy has bounced back from pandemic woes … as consumers freed from restrictions splashed the cash and tourists returned,” which is why investors may have not been “blown off course by American worries.” (Source:Barron’s)

In addition, whereas inflation may have proven to still be stubborn across the global economies, the report showed that Japan’s inflation rate may have slowed a tad from its recent forty-year highs back in January. 

Did Foreign Investors Set Foot in Japan?

In addition to GDP, some analysts actually attributed these boosts to the US debt ceiling drama as they believe that it may have increased the traction for riskier assets. This may be because yesterday, US President Joe Biden and US House Speaker Kevin McCarthy, revealed that they do not think that the US will default. These remarks may have reassured Americans in general, and investors, in particular. 

Economists also noted that the recent gains may suggest that foreign investors are back to the Japanese markets which may indicate signs of “equity market recovery in Japan.” 

Nonetheless, despite these possibly hopeful advancements, some analysts believe that the US debt ceiling might still pose a risk to this bullishness. One Goldman Sachs (GS) analyst even stated that “the main risks to our bullish view on Japanese equities are from overseas factors such as the U.S. debt ceiling problem, recession risk, and geopolitical risk.”

Moreover, whereas the economic data may have pushed some Japanese indices up significantly, the Japanese yen did not have a similar fate. Improved US debt ceiling talks and hawkish Fed speeches throughout the week may have drew traction to the US dollar and weakened the yen. As a result, the USD/JPY (USDJPY) Forex pair hit 2-week highs on Wednesday. 

In summary, while markets are recognized for their volatility and unpredictability, it is difficult to deny that developments in one country’s economy can impact other economies. Therefore, traders may want to keep an eye on any significant economic events or decisions to see how they will affect the markets and whether Japan can sustain its stellar growth. 

Accordingly, events like central bank meetings and interest rate decisions can have major impacts on the trajectory of the market especially since Japan and the US are among the world’s biggest economies. The Bank of Japan (BoJ) is scheduled to release its rate decision on Friday, June 16th, 2023 while the US Federal Reserve’s next rate decision meeting is scheduled for June 13-14, 2023.