For over three decades, Japan's Nikkei 225 was the poster child for how long it can take a stock market to recover. After peaking at 38,957 in December 1989, the index entered a prolonged decline that mirrored the country’s economic stagnation, a lost decade that stretched well into a lost generation.

 

Now, that era is officially over.

 

On 31 October 2025, the Nikkei closed at 52,411.34, shattering its 1989 record and rewriting the narrative of the Japanese stock market. For investors, the headline is not just about numbers; it’s a moment that forces a reappraisal of a market long viewed as a cautionary tale.

 

So, what changed?

 

From collapse to caution: The roots of the lost decades

 

To understand the weight of this moment, you have to rewind to the 1990s.

 

Japan’s economic boom in the 1980s was fuelled by speculative excess. Asset prices, particularly real estate and equities, soared to unsustainable heights, driven by easy credit and sky-high expectations. At the peak, Tokyo real estate was so inflated that the land beneath the Imperial Palace was said to be worth more than all the real estate in California.

 

When the bubble burst in the early 1990s, it didn’t trigger a typical recession. Instead, Japan entered a prolonged deflationary spiral, hampered by:

 

· A banking system loaded with bad loans

· Chronic underconsumption

· Ageing demographics

· And a political system often too slow to act

 

By the early 2000s, the Nikkei had lost more than 75% of its value from the 1989 peak.

 

What’s fuelled the rebound?

 

Japan’s recent rally isn’t a fluke. It’s the product of both long-term reform and short-term momentum.

 

Corporate Governance Overhaul

 

Decades of investor pressure have borne fruit. Japanese companies now show greater transparency, higher returns on equity, and a willingness to return capital via dividends and buybacks.

 

Inflation’s Comeback

 

After years of deflationary concerns, inflation has finally returned, modest, but enough to reframe Japan’s economic outlook. The Bank of Japan's long-running ultra-loose policy is cautiously signalling normalisation, which markets are reading as confidence, not panic.

 

Global Investor Interest

 

With China’s slowdown raising questions, Japan has become a preferred alternative for Asia-focused capital. Foreign inflows have picked up pace in 2025, particularly in sectors like semiconductors, automation, and energy efficiency.

 

A Weak Yen, Strong Exports

 

The yen remains historically weak, giving Japanese exporters a significant tailwind, especially important in today’s fragmented global trade landscape.

 

Still room for caution

 

Despite the celebrations, some structural challenges remain. Japan's population continues to age rapidly, and productivity growth - while improving - still lags some global peers. Wage inflation is also uneven, and debt remains high.

 

Yet today’s Japan is not yesterday’s Japan.

 

The Nikkei’s rise above 52,000 is more than a recovery; it’s a reflection of a market and an economy that have adapted, evolved, and - finally - broken free from the shadow of its past.

 

Investor takeaway: Time to rethink Japan?

 

For years, global investors have viewed Japan as a tactical trade; undervalued, but structurally constrained. That narrative may need to change.

 

The Nikkei’s breakout reflects more than just technical momentum. It’s being underpinned by real shifts in how Japan Inc. operates, and how capital allocators - both domestic and international - engage with it.

 

Whether Japan will ever retain that high-growth economy tag again remains to be seen. But in a world short on predictability, it’s becoming something else entirely: stable, reform-minded, and investable.

 

#Nikkei225 #JapanMarkets #InvestorPerspective #AsiaEquities

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