Strong performance from Japanese stock market

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What's going on?

The Nikkei 225, the index for Japans 225 biggest companies reached a 15-year high. According to the Financial Times, the Japanese equity market is the second best performer in 2015 (behind China). The market rose 15% in US dollar terms.

What does this mean?

There are two reasons offered for the success of Japans stock market. First Prime Minister Shinz? Abe has introduced ambitious economic measures. These include a greater level of quantitative easing than that seen in the other major currency zones. The resulting drop in the Japanese currency has boosted the prospect for exporters. Commentators hope that the improved fortunes of exporters and the economic reforms, such as higher wages, will spur consumption levels. The second presumed reason for the fortunes of Japans stock market is the reforms taking place within individual companies. Anglo-Saxon investors have long pushed Japanese companies to adapt the shareholder-focused policies and transparency measures common among Anglo-Saxon companies. There are some signs that this is happening. Fanuc catered to pressure from activist investors such as Daniel Loeb to improve dialogue with investors. Nintendo catered to investors urging them to focus more on mobile gaming.

Why should I care?

As a non-Japanese citizen, the Japanese stock market will primarily have indirect impacts on your life. The greatest effect may be that your pension fund might be invested in Japanese companies. The lower Japanese currency brought about by Abes policies - called Abenomics - will have a more direct impact. Your Japanese electronics and cars become cheaper. Investors might want to jump on the bandwagon and invest in Japanese companies. Unfortunately jumping on bandwagons is usually not a winning strategy for long-term investors. The question is of course whether the two reasons for success are correctly assessed, sustainable and set to continue in the future. The success of Abenomics will be largely judged based on whether Japanese consumption picks up. If that happens, the Japanese economy will be fundamentally different to the slump it has been in for the last 2.5 decades. Retailers catering to the domestic market would fare much better. The success of company reform might be even more complicated. Public market investors can be incredibly short-term and fickle. Calls for returns, dialogue and transparency can disadvantage the longer-term operations of a company whilst releasing a short-term boost to share prices. The core question is whether the changes are for the long-term benefit of the companies and its investors. This requires going through the details of each company.
Originally posted as part of the Finimize daily email.

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