Japanese stocks have been the standout performers so far in 2024. The Nikkei is higher by more than 3% so far in 2024, while the S&P 500 is up a mere 0.25%. We have only just started the year, so some divergence is to be expected, however, the Nikkei’s 30% rise in the last 12 months, highlights how far this index has come as investors once more warmed to the Japanese stock market.
The Nikkei rose to its highest level since 1989 at 34,440 on Wednesday and is up more than 2%. Momentum is to the upside, which could see this index target its all-time high of nearly 39,000, last reached at the end of 1989. All sectors of the index performed strongly, except energy, which suggests that the rally for the Nikkei is broad-based. This also makes it likely that the market will attempt to push this index to a fresh record high in the short term.
It is worth noting that the Nikkei rally is looking extended, and the index has risen by more than 30% in the past 12 months, so whether it can continue to extend gains if it manages to break to a fresh record high, could depend on what the broader market is doing. For now, the Nikkei is powering ahead on its own, and has broken away from the rest of the global stock market pack.
As you can see in the chart below, which shows Nikkei volatility (Green line) and the Vix index, the S&P 500’s volatility gauge, Nikkei volatility has diverged from the Vix index since May 2023. This corresponds with the start of last year’s rally in the Nikkei and is one explanation for why the Nikkei has outperformed the S&P 500 in the last year. The chart also shows the clear divergence in volatility for the Nikkei vs. the Vix since the start of this year, and the higher level of volatility for the Nikkei could drive this index to touch those 1989 record highs in the coming days or weeks.
Chart 1: Volatility for the S&P 500 and the Nikkei
sSource: Bloomberg
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