What’s behind the 34-year roundtrip for the Nikkei 225

“Although the most recent push to these levels has been rapid, we do not view this as a mountaineering ascent to a peak where the next phase is how to manage the descent,” said Morgan Stanley strategists led by Jonathan Garner, who back in 1989 would type up Eurobond closing prices from London and fax them to Tokyo.

The Morgan Stanley analysts noted that profit from the Prime Section-based group of companies has jumped 20% year-over-year. Data from Societe Generale meanwhile shows Japan is the only country where earnings per share estimates for this year and next are actually rising.

That’s impressive considering that there isn’t a clear driver for profit growth like artificial intelligence that has propped up the likes of Nvidia
NVDA,
-2.85%
and Super Micro Computer
SMCI,
-6.78%.
And oddly enough, many of Berkshire Hathaway’s holdings including Mitsubishi
8058,
+3.04%,
Mitsui
8031,
+1.95%,
Marubeni
8002,
+2.15%
and Sumitomo
8053,
+1.44%
— which all have been stellar investments for the Warren Buffett-led company —are the biggest drags on Japanese profits.

Japan has pushed companies to adopt corporate governance reforms, which has led to record-high stock buybacks, while the country’s central bank is considering exiting its negative interest-rate regime amid signs it may be escaping deflation.

Analysts do note that the Nikkei, like the Dow Jones Industrial Average, is a price-weighted equity index, which produces some unusual results. The biggest weight in the index, Fast Retailing
9983,
+3.15%,
is actually the seventh largest company by market cap; the biggest company, Toyota Motor
TM,
+0.14%,
is number 15 in the Nikkei by weight.

The more broadly, and one could say normally, constructed Topix
JP:180460
is still about 8% away from its peak. U.S.-based investors would’ve been better off staying at home over the last 52 weeks, with the S&P 500
SPX
up 24%, compared to a still impressive 20% rise for the iShares MSCI Japan ETF
EWJ.

There are of course risks.

Japanese companies, which have adjusted to a feeble domestic economy, are highly exposed both to the U.S. — not a problem right now — and China, which is struggling with a Japan-like debt overhang. There’s also the yen
USDJPY,
-0.10%,
which could surge in value if the Bank of Japan lifts interest rates, possibly making Japan’s exporters less competitive.