After hitting new highs, BlackRock and Morgan Stanley continue to be bullish on the Japanese stock market!

The Japanese stock market is on a roll, with the Nikkei 225 index breaking the record set before the burst of the 1989 financial bubble last week, and hitting a new all-time high on Monday. The TOPIX index is also approaching its historical record.

Amidst these record highs, Wall Street giants BlackRock and Morgan Stanley continue to be bullish on Japanese stocks. BlackRock reiterated its overweight rating on Japanese stocks, suggesting that they may continue to "break new highs," while Morgan Stanley stated that there are no signs of overheating in the Japanese stock market, and the Nikkei hitting new highs may be "just the beginning."

BlackRock's strategist team led by Jean Boivin released a report on Monday local time, indicating that there is still room for Japanese stocks to rise in the future, driven by strong earnings and corporate governance reforms.

The team wrote:

We believe that both macroeconomic prospects and developments at the company level will drive the next phase of the rise in Japanese stocks.

BlackRock also mentioned that the weak yen has boosted the profitability of companies overseas, and the market outlook remains optimistic as rising inflation will prompt companies to raise prices, protecting profits, while wage growth stimulates consumer spending. Corporate governance reform is also a "key driver" of the stock market rally, with the Tokyo Stock Exchange pushing companies to improve profitability and return funds to shareholders.

Morgan Stanley shares a similar view.

In their earnings report released on Monday local time, analyst team led by Sho Nakazawa from the institution pointed out that despite the current high position, various indicators indicate that the current Japanese stock market is not overheated:

The current level of the Nikkei index is roughly the same as in December 1989, but the current nominal GDP is about 1.4 times that of that time.

At the end of 1989, the average P/E ratio of the Nikkei was 62 times, roughly 4 times the current level. The earnings per share at that time was 622 yen, significantly lower than the current 2373 yen.

Corporate financial conditions are also much stronger than in 1989, when high debt levels led to severe financial damage to companies. Since the late 1990s financial crisis, most Japanese companies have strengthened their financial strength by replacing debt with equity. Various signs indicate that the valuation of the Nikkei Index is not higher than that of 1989, and the market enthusiasm is also not as high as in 1989.

Even in a horizontal comparison, Japanese stocks have not shown any signs of overheating.

Nakazawa pointed out that the expected earnings per share growth of Japanese stocks will exceed that of the United States (based on the S&P 500 Index) and Europe (based on the Stoxx 600 Index), but the overall expected P/E ratio is still lower than the latter two.

Morgan Stanley believes that the recent rise in Japanese stocks has been largely supported by corporate profits, to a much greater extent than during the bubble period. There is still significant room for improvement in the efficiency of Japanese corporate balance sheets. If Japanese companies achieve higher capital efficiency, their valuation may further increase.

Therefore, Morgan Stanley has reached the following conclusion:

The historical high of the Nikkei Index is just the beginning; maintaining the view that Japanese stocks will continue to rise further.