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Why Japan's stock market is breaking 35-year records even as its economy falls into recession: Welcome to the investing world of 'not that bad'

Japan’s stock market has been on a tear in recent months, breaking 35-year records even as the country’s economy falls into recession. This may seem counterintuitive to some, as a recession typically leads to a decline in stock prices. However, Japan’s stock market is showing resilience in the face of economic challenges, and investors are flocking to the country’s equities in search of returns.

The Japanese economy has been struggling for years, with stagnant growth and deflationary pressures weighing on economic activity. The country’s aging population and high levels of debt have also contributed to the economic malaise. In recent months, the coronavirus pandemic has further exacerbated these challenges, leading to a sharp contraction in economic activity and a surge in unemployment.

Despite these headwinds, Japan’s stock market has been on a tear, with the Nikkei 225 index hitting levels not seen since the 1980s. So why is Japan’s stock market performing so well even as its economy falters?

One reason for the stock market’s strong performance is the massive stimulus measures implemented by the Japanese government and the Bank of Japan. The government has rolled out multiple stimulus packages to support the economy, including cash handouts to households and loans to businesses. The Bank of Japan has also ramped up its asset purchase program, injecting liquidity into the financial system and supporting asset prices.

These stimulus measures have helped to boost investor sentiment and drive up stock prices. In times of economic uncertainty, investors often turn to equities as a hedge against inflation and currency depreciation. With interest rates at historic lows, equities have become an attractive investment option for investors seeking higher returns.

Another factor driving the stock market’s strong performance is the resilience of Japanese companies. Despite the challenging economic environment, many Japanese companies have proven to be resilient and adaptable. Companies in sectors such as technology, healthcare, and e-commerce have seen strong demand for their products and services, driving up their stock prices.

Additionally, the weak yen has provided a tailwind for Japanese exporters, boosting their competitiveness in global markets. A weaker currency makes Japanese goods more affordable for foreign buyers, leading to increased exports and higher profits for Japanese companies. This has helped to drive up stock prices for export-oriented companies and support overall market performance.

Furthermore, Japan’s stock market has benefited from a rotation out of traditional safe-haven assets such as government bonds and into riskier assets such as equities. With bond yields at record lows, investors are seeking higher returns in the stock market. This has led to increased demand for Japanese equities and pushed up stock prices.

It is important to note, however, that the rally in Japan’s stock market is not without risks. The country’s economic outlook remains uncertain, with the pandemic continuing to weigh on economic activity. The possibility of a second wave of infections and further lockdown measures could derail the economic recovery and put pressure on stock prices.

Additionally, the high levels of government debt and the Bank of Japan’s massive stimulus measures raise concerns about the sustainability of Japan’s economic policies. The country’s debt-to-GDP ratio is among the highest in the world, and the central bank’s aggressive asset purchases have raised worries about financial stability and inflation.

In conclusion, Japan’s stock market is breaking 35-year records even as its economy falls into recession due to a combination of factors. Massive stimulus measures, resilient companies, a weak yen, and a rotation into equities have all contributed to the stock market’s strong performance. However, investors should remain cautious and monitor the economic and financial risks facing Japan in the months ahead.

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