The last time Japan's Nikkei index of the country's top 225 stocks closed above 24,000, Mikhail Gorbachev was still President of the USSR, and Bill Clinton was still a state governor with White House dreams. But on Monday, the Nikkei closed at 24,124.15, its highest price since 14 November 1991.
Although the index dipped back below the 24,000 mark on Tuesday, the psychological importance of the breakthrough for investors is immense. In late 1991, Japan's asset price bubble was teetering on the brink of a collapse which would trigger what is often referred to domestically as the "Lost Decade" - or even the "Lost Score", in reference to the subsequent two decades of declining GDP, lower wages, and a stagnant economy. At its lowest point in early 2009, the Nikkei bottomed out around 7500. Tuesday's breakthrough can be attributed to increased buying activity from speculative players forced to repurchase futures after betting on an even more sluggish economy. But that doesn't meant that the Japanese economy is completely out of the woods, or even fully recovered. The Nikkei is still a far cry from its 1989 high of almost 39,000, and it has more than two decades' worth of returns to catch up on in order to bring it back in line with the rest of the world's advanced economies.
While Japan's economy still has a ways to go, there is reason for cautious optimism. Tokyo real estate prices have hit a 27 year high, and investor sentiment is being buoyed by the government's ongoing monetary easing policy. All of this is happening within a broader context that is seeing healthy growth from non-US developed and emerging markets.
Bottom line: Japan's stock market has seen a surge in prices, with the Nikkei finally eclipsing the highs it made in 1991. We think Japan will benefit tremendously as the global economy improves and trade in Asia accelerates.