Insight: Japan’s Nikkei225 stock average surpassed its 1989 bubble-era peak early last week and kept right on going, crossing 40,000 on March 4. This latest milestone in what is now, more or less, a three-year rally comes against the background of an economy that continues to grow only modestly.
Impact: Macro expansion, however, is only one factor, and not the most important. What has caught the imagination of investors, particularly foreign ones, are corporate governance reforms, from asset sales to share buybacks, which are leading to higher returns on equity, as well as strong corporate earnings and initiatives to encourage more retail investors back into the market. This is being fuelled by the weak yen and underpinned by the global tech rally. Add in the fact that valuations are still modest by international standards and many analysts believe this rally has legs. Of course, U.S. shares are at or close to record highs as well – but the S&P’s multiple is much closer to bubble territory than the Nikkei’s.