There is a change underway in Asia that is reflected in global financial markets.
The Japanese stock market, overlooked by investors for decades, is making a furious comeback. The benchmark Nikkei 225 index is closing in on the record set on December 29, 1989, which effectively marked the peak of Japan's economic rise before a collapse that led to decades of low growth.
China, long an unmissable market, is in a downward spiral. Stocks in China recently hit lows not seen since the 2015 plunge, and Hong Kong's Hang Seng Index was the worst-performing major market globally last year. Shares were only able to halt their decline when Beijing recently signaled its intention to intervene, but have remained well below previous highs.
This year should be a turbulent one for global markets, with unpredictable swings as economic conditions diverge and voters go to the polls in more than 50 countries. But an unforeseen turnaround is already underway: a shift in investors' perceptions of China and Japan.
Japan's Prime Minister Fumio Kishida took advantage of this shift, speaking to 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 gave a keynote speech at the event.
“Now Japan has a unique opportunity to fully overcome a quarter-century of low economic growth and a deflationary environment,” Mr. Kishida said in a video recording. His government, he said, will “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 honing 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 $6.5 billion a week earlier, according to data from the Japan Exchange Group. That's a significant shift from the roughly $3.6 billion withdrawn in December.
All that money has sent Tokyo's Nikkei 225 up about 8 percent this month. The market has grown by over 30 percent in the last 12 months. This week Toyota rose to a record market value for a Japanese company, about $330 billion, surpassing the mark set in 1987 by telecommunications group NTT.
A combination of factors has 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 Japanese-based multinationals that make their profits abroad. Major reforms in the corporate sector have given shareholders more rights, allowing them to demand changes in strategy and management. Unlike inflation in other parts of the world, rising inflation in Japan was 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 buy.
And there is another factor: geopolitics. The longer-term outlook for Japan, the third-largest economy, looks good, while parts of the world are disappointed with the second-largest economy, China.
“One of the best things to happen to Japan is China,” said Seth Fischer, founder and chief investment officer of Oasis Management, a Hong Kong-based hedge fund.
“Japan has been working for a decade to create a more productive business environment and a better place to be an equity investor by continually seeking to increase value,” Mr. Fischer said. “People don’t believe the same things about China.”
In a recent Bank of America survey of global fund managers, selling Chinese stocks and buying Japanese stocks were two of the three most popular trading ideas. (The other option was to stock up on high-flying US tech stocks.)
China's ruling Communist Party has sought to interfere in the corporate sector in recent years, sparking concerns among investors that politics is often more important than the bottom line for many of China's corporate giants. The blurring of politics and economics has also raised concerns in Washington and European capitals and led to regulations that have prevented foreign investment in certain sectors and companies.
China has not struggled for economic growth like Japan, but a protracted housing market collapse has shaken consumer and investor confidence. Ongoing problems with the Chinese economy have exacerbated the weakness of the local currency, the yuan.
Much of the negative sentiment has been reflected in Hong Kong, an open market where global investors have traditionally bet on China and its companies. The market took a hit last year and continued to slide in the first three weeks of this year.
Beijing intervened this week to reverse the selloff. On Monday, the country's second-largest official, Premier Li Qiang, called on authorities to act “more forcefully” and take more measures to “strengthen market confidence.” His speech boosted stock prices, as did a Bloomberg report quoting unnamed officials saying authorities were considering a $278 billion market rescue.
Then on Wednesday, China's central bank gave commercial banks the ability to lend more, essentially pumping $139 billion into the market by reducing the amount of money banks must hold in reserve. Regulators also relaxed rules for repaying indebted real estate developers.
The words and actions drove the market higher this week, with the Hang Seng Index recording three of its best days this year. The Chinese markets of Shanghai and Shenzhen also recovered, although not as strongly.
But many investors say the measures have failed to address a much larger problem: China's economic development. They remain disappointed with China's response to the broader economic downturn and its apparent reluctance to undertake spectacular stimulus measures as in previous periods of economic stress.
“We hope it will still happen,” said Daniel Morris, an analyst at BNP Paribas, pointing to greater efforts to support markets. “But we have no confidence that it will be that way. To be honest, at the end of last year I would have thought that all the bad news would have been priced in, and yet we have fallen even further this year.”
Economists, financiers and business executives around the world expected an economic recovery from China last year after the government scrapped its “zero Covid” policy and imposed lockdowns that temporarily put the country into an economic standstill. But Chinese consumers did not engage in the “revenge spending” seen elsewhere after reopenings, and a housing crisis weighed on families, many of whom have invested nearly three-quarters of their savings in real estate.
“There is not a lot of confidence domestically, 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. “Somehow the markets were expecting much more and are becoming increasingly disappointed and disillusioned.”
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 were well above the value of their underlying assets, a sign of investors' enthusiasm for investing.
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