(July 4): Japan’s Topix stock index powered past its bubble-era peak to close at a fresh record high on Thursday, as buying momentum spread beyond a narrow set of stocks and underscored the firm foundations of the rally.

The broad-based benchmark ended the day 0.9% higher at 2,898.47, soaring above the previous all-time high set in December 1989. Almost all of the 33 industry sub-indexes in the gauge of more than 2,000 companies climbed, with automakers providing the biggest boost. Insurers and banks are among the best performers since the index’s trough in mid-April, on expectations the Bank of Japan (BOJ) will raise interest rates, improving their profitability.

“A lot of the initial gains we have had have been from the exporter and tech heavy Nikkei index, so it’s not a huge surprise to see the Topix playing catch up here,” said Andrew Jackson, the head of Japan equity strategy at Ortus Advisors.

The blue-chip Nikkei 225 Stock Average also closed at an unprecedented level. It initially reclaimed an all-time high in February, helped by a global tech rally and a weaker yen boosting exporters. Both equity measures surged more than 25% last year as global funds poured into the market, attracted by ultra-low borrowing costs, booming profits and the Tokyo bourse’s push to improve corporate governance.

There are few indications the BOJ’s shift to tighter monetary policy is damping sentiment, with investors buying into the idea that the nation’s fortunes have changed for the better as inflation returns. Banks have advanced on speculation higher yields will help improve lending margins, while insurers have gained on expectations they will boost their profitability through their bond investments.

But the BOJ’s decision to wait until its July meeting to set out plans for reducing the amount of bond buying sent the yen falling, disappointing investors who were seeking more details. The yen is also reaching fresh multi-decade lows, reducing its boost to exporter shares as fund managers are wary of currency intervention. Concerns are also mounting that the weak yen has become a liability for Japanese companies, and its economy.

Corporate governance reforms

Still, Bank of America’s June fund manager survey showed Japanese stocks remain a favourite market in Asia, with one-third of respondents saying the most important theme is corporate governance improvements. Analysts are expecting the Tokyo Stock Exchange’s (TSE) latest plan to revamp the Topix index to add further pressure on companies to improve their governance.

“Japanese corporates remain extremely keen to show that they are responding to corporate governance reform pressure from the TSE,” wrote Goldman Sachs Group Inc strategists including Bruce Kirk in a note.

In a sign of change, some activists are starting to score victories in the latest annual general meetings. Shareholders of clothing firm Daidoh Ltd backed three of six board candidates proposed by Japanese fund Strategic Capital Inc, while the president of a small stock brokerage Toyo Securities Co was forced to withdraw his candidacy for reappointment to the board due to lack of shareholder support.

“Unlike the Nikkei 225, which is biased towards certain stocks, the Topix movement indicates the bottoming out and an all-time high of the Japanese market as a whole,” said Hideyuki Ishiguro, the chief strategist of Nomura Asset Management Co.

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