Nikkei’s 27-yr high recalls bubble era / Today’s foreign investors prefer companies that share profits

 

The Nikkei average rose Friday for the 11th consecutive trading day, its longest winning streak since its 13-consecutive-session climb in Feb. 10-27, 1988.

However, the current economic situation is different from that 27 years ago, when Japan was in the middle of a bubble economy that saw overheated stocks and land transactions. Today foreign investors seem to be leading the market as they support Japanese firms trying to share profits with their stockholders as much as possible.

Companies’ earning capacities today have improved compared to those in 1988. The fiscal 2014 post-tax profits of companies listed on the Tokyo Stock Exchange’s First Section — excluding financial firms — totaled ¥20.44 trillion as of May 20, according to SMBC Nikko Securities, Inc.

The figure for fiscal 1987 was ¥3.40 trillion, so corporate earning capacity can be said to have greatly improved, although the total profit rise is partly explained by the doubled number of First Section companies.

“During the bubble economy, companies put priority on making money while running up large costs,” an SMBC Nikko analyst said.

Nowadays, Japanese stocks are attracting more foreign investors than ever. Foreign investors accounted for about 10 percent of the trading value on the Japanese stock market in 1988, compared to about 60 to 70 percent now, according to the TSE.

The rankings of top corporate stocks by market value have also changed. Six of the top 10 stocks by market value in 1988 were major banks, according to Nomura Securities Co. However, the top rankings are currently dominated by firms active overseas, including Toyota Motor Corp., Honda Motor Co. and SoftBank Corp.

In 1988, the Nikkei average stood above 25,000. It had marked its largest-ever drop in October 1987 due to the “Black Monday” stock crash in the United States. After that, the Nikkei average steadily headed toward recovery, reaching a record high of 38,915 at the end of December 1989.

People who earned profits on stock and land transactions were called the “new rich.” Nissan’s high-end Cima sedan saw massive sales, giving rise to the expression “the Cima phenomenon.”

The jobless rate for February 1988 was 2.7 percent — much lower than the current figure — and wages increased 3.3 percent on a year-to-year basis. Employment had improved while people’s incomes went up.

Rising stock prices

Total dividends in fiscal 2014 for the shareholders of all listed companies, about 3,600 in number, are expected to reach about ¥10.8 trillion. This would be the third annual high in a row, according to Nomura Securities Co.

Foreign investors appear to favor Japanese firms that are making efforts to give more back to their shareholders.

Data compiled by the Japan Department Stores Association show that sales of fine art, jewelry and precious metals at departments stores nationwide totaled ¥27.7 billion in April this year, or a 5.6 percent rise from April 2013, before the consumption tax hike. The positive results are partly attributed to the increasing number of foreign visitors to Japan, and were also aided by wealthy people’s active consumption as higher stock prices increased their assets.

For now, few market observers are concerned with a return of the economic bubble.

However, an analyst at Meiji Yasuda Life Insurance Co. warned: “Stock prices are rising even though the economy has yet to recover enough for all people to feel it amid slow wage hikes. We may be entering a situation like a bubble economy.”