Nikkei Index Surpasses 40,000 Mark for the First Time Driven by Technology Stocks

On 4 March 2024, Japan's Nikkei stock index surpassed the 40,000 milestone for the first time driven by a surge in technology shares. The index rose by 0.7% to reach the 40,192.48 level primarily fueled by a rally in Japan's tech sector which reflects the ongoing boom in artificial intelligence in US stocks. Additionally, the S&P 500 and Nasdaq also achieved record highs contributing to positive global market sentiment.

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What's driving the rally?

On Monday blue chip index climbed to a fresh intraday record of 40,301.30 marking a 1% increase. Tech shares including Advantest Corp drove the rally as top performers. However, the broader Topix index slightly dipped by 0.02% to 2709.07 level.

Foreign investors are increasingly bullish on Japanese stocks drawn by corporate governance reforms, attractive valuations, a weakened yen and robust corporate profits. Warren Buffett's endorsement of Japanese trading houses has further boosted confidence while concerns over China's economic slowdown have prompted investment shifts toward Japan.

Tokyo Stock Exchange is encouraging transparency and shareholder returns with many companies announcing share buybacks, dividend hikes and management buyouts. Activist investors are also becoming more active particularly in companies with strong cash positions.

Despite broader economic challenges such as a shrinking population and structural issues, recent economic data signals optimism for Japanese markets. Corporate earnings surged by 45% yoy in the last quarter of 2023 according to Goldman Sachs. while rising wages from key companies like Toyota and Nintendo are boosting confidence in the economy.

Global Factors 

Influx of foreign investment, liquidity from outflows out of China and hopes for US interest rate cuts are contributing to the positive market sentiment. Additionally, signs of cooling inflation and growing interest in artificial intelligence are fueling optimism within the tech sector.

While Japan's markets are reaching new heights economists caution that prolonged weakness in economic indicators could lead to a sharp downturn. Speculation surrounds the Bank of Japan's potential move to end negative interest rates which could impact liquidity and market stability in the future. Despite the current rally the sustainability of Japan's market momentum remains uncertain.

Japanese equity market has seen remarkable growth reaching a new high after almost 35 years. This surge is seen as a catch up to broader economic growth rather than leading the way. Japan's GDP in dollar terms increased from 3.1 to 4.2 trillion dollars during this period indicating alignment with economic expansion.

To Summarize

While the current rally showcases Japan's market resilience and attractiveness to investors, uncertainties persist regarding the sustainability of this momentum. The evolving global economic landscape, coupled with domestic challenges will likely influence the trajectory of Japanese markets in the coming months.