Japan’s Nikkei 225 stock index closed on Friday at its highest level since November 1991 as individual investors bought up the shares of blue-chip companies at the expense of smaller, more speculative groups.

The benchmark, which has been described by some analysts as a “barbarous relic” but remains the favourite yardstick of Japanese retail investors, was propelled to its 29-year high by resurgent stocks like Sony, SoftBank and Uniqlo parent Fast Retailing.

Other Nikkei stocks that have performed strongly in recent weeks include Japan’s biggest pharmaceutical names such as Eisai and Daiichi Sankyo, factory automation leader Fanuc, and the youngest company in the index, the online medical services group M3.

The Nikkei’s composition means it is often associated in Japanese investors’ minds with growth and exports. However, professional investors say that like the Dow Jones Industrial Average in the US, its weighting by the share price of constituents makes it a less reliable gauge of the country’s overall market.

Line chart of  showing Japan's blue-chip benchmark hits three-decade high

Traders in Tokyo said that the Nikkei, which broke through two key levels on Monday and Thursday to end the week at 24,325, appeared to have been pushed higher by individual Japanese investors moving cash from smaller, speculative names and instead chasing household name domestic giants. 

Mizuho Securities chief equity strategist Masatoshi Kikuchi said that the Nikkei’s move was driven by individual investors using leverage to magnify their potential returns and losses — a much larger and more active group since the Covid-19 pandemic restricted millions to their homes and prompted many to open online trading accounts.

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Until recently, he said, these traders concentrated their activity on Tokyo’s Mothers market for start-up companies, but had more recently drawn their profits from that and invested in the main board of the Tokyo Stock Exchange. Mr Kikuchi added that the Nikkei was feeling the benefit of that move because it was generally perceived by retail investors as being the index of more globally successful Japanese companies.

The multiyear high attained by the Nikkei was not matched by the much broader Topix index, which climbed strongly through the week, but was still below levels seen in February this year.

The Topix weights its constituents by market capitalisation, tracks the stocks in the sprawling first section of the Tokyo Stock Exchange and is freighted with old economy stocks, the country’s three megabanks and the scores of beleaguered regional banks whose performance most strongly reflects Japan’s long-term demographic decline. 

Any celebration of the Nikkei’s performance was tempered by the giant shadow that looms over it: the late 1989 peak where the index almost touched 39,000 in a frenzy of speculative buying. 

“It is bizarre to think that it has taken almost 30 years for the Nikkei to recover to 24,325, and perhaps even stranger to think that we’ve got to go up more than 50 per cent from here to hit an all-time high,” said Pelham Smithers, a veteran analyst of the Japanese market at Pelham Smithers Associates.

But he added that there were grounds for optimism. The recently reported second-quarter earnings season has delivered a number of strong results from Toyota and other big industrial names, indicating, said Mr Smithers, that Japanese business has adapted well and quickly to tough conditions: “something that it has struggled to do in the past, and a reason why it has taken so long for the market to recover,” he said.

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Notable, traders say, has been the lack of contribution of foreign investors to the recent rally. A report released by Japan’s finance ministry on Friday showed overseas investors were net sellers of about $2bn worth of Japanese equities in the week that ended on October 31, defying predictions that they might view the September installation of Yoshihide Suga as Japan’s new prime minister as a signal to “buy Japan”.

Instead, market participants said that the Nikkei’s move signalled a potentially important development — the long-awaited return of Japan’s domestic investors as a force in the market.

Via Financial Times