“Healthy.” That was one adjective bandied about Thursday, when the meteoric rally in Japanese equities finally pushed the Nikkei 225 beyond its late-1989 highs to a new record.

The stock gains are “healthy,” that’s for sure. Healthy, hefty, huge and inexorable. Japanese shares are up some 18% this year alone, easily outpacing other major markets and benchmarks. Indeed, local blue chips are trouncing the Nasdaq 100 in 2024 (albeit not Nvidia). If you measure from the pandemic lows in late March of 2020, the Nikkei has nearly matched big-cap US tech’s performance. No small feat to put it mildly.

There’s a lot going on here, but the short version says the Japanese economy finally exorcized the deflation demon, and with valuations reasonable (even after the run-up illustrated by the simplest of simple figures below), corporate fundamentals generally sound and the yen historically weak, the sky’s the limit.

As a quick aside, the Nikkei’s summit push robs bears of a long-standing snarky rejoinder. For decades, the assertion that stocks go up over time was refutable by reference to Japanese stocks. No more. (Of course, most investors don’t expect to wait a quarter century for new records, so I think the snark still works. At least until Japanese equities run another 10% or 15% higher.)

Local shares have benefit enormously from shifting investor preferences in the region, where that means money looking for a safer harbor amid China’s three-year (and counting) bear market. In some respects, this is a perfect bullish storm for Japan: The Chinese equity market is suddenly uninvestable (critics like myself would argue it’s always been uninvestable) at a time when Japan’s economy has suddenly normalized.

Japanese shares are famously cheap, and there’s plenty of scope for corporates to return more cash to shareholders. Indeed, that push is being facilitated by the stock exchange. As Nikkei noted nearly a year ago, “Japanese companies return less of their profits than their overseas counterparts [and] the reorganization of the Tokyo Stock Exchange has encouraged companies to take greater account of shareholders.” It’s working, apparently. Buybacks in Japan hit a record for a second straight year in 2023.

Reuters correctly assessed that jaded investors are now rushing to catch a moving train. “A generation of Japanese investors [scarred] through bitter experience have been sellers into this rally [but] global managers are now feeling the pain of missing out and scrambling to get in,” a piece published Thursday read.

Japanese equity-focused ETFs and mutual funds have seen inflows in every week this year but one, according to EPFR data that’ll get a refresh later Thursday.

There are caveats. Lots of them, actually. Bloomberg described Japan as a country “escaping deflation and on a path to sustainable growth.” That’s true — if you don’t count the recession. (Ba dum tiss.)

Just last week, data showed the Japanese economy contracted in Q4, knocking the country down one spot on the global GDP league tables.

Both household consumption and non-residential investment slipped again, where “again” means both were negative in Q2, Q3 and Q4. (To be fair, the Bloomberg article linked above did get around to mentioning the recession. But it’s still funny.)

And then there’s the BoJ. Although officials aren’t entirely sure Japan has, in fact, cast aside the deflationary mindset that bedeviled the nation since the bubble burst forever and a day ago, Kazuo Ueda’s still poised to go ahead with a rate hike. And fairly soon. Although policy normalization is a vote of confidence in the economy, Ueda needs to be sure it isn’t misplaced. A recession doesn’t exactly make the case.

Anyway, a record high for Japanese stocks! That’s the headline on Thursday. And rightfully so. After all, this is the first record high for Japanese shares that many investors have seen in their lifetimes.