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Over the next month, 6 and 1/2 million primary school children across Japan will cast their ballots on which adorable mascot should represent Tokyo for the 2020 Olympics. Investors wondering what Japanese stocks have to offer global funds would do well to note the result.
Last week, when the Nikkei 225 average of Japan's prestige large cap names broke above the 24,000 line for the first time since 1991, it was a top story on the evening news and a source of predictable "Japan is back" heavy breathing. The moment of far greater historic significance - but much less fanfare, though - took place three days earlier, when the Nikkei Jasdaq index, which bristles with robotics, mobile app, biotech, and other buzzy stocks and measures the performance of a board primarily designed for start-ups, broke 4,100 points.
The Nikkei 225 celebration was relative. Even at 24,000, it's still 40% below its 1989 bubble era peak, and even bullish analysts have yet to be convinced that it can go much higher than 25,000 points for now. The Jasdaq, which began life in 1983, has eclipsed its own past to sit at an all-time high. In 2017, the index rose more than 45%, as the Jasdaq market outperformed all other Japanese bourses and outdid did its US counterpart, the Nasdaq.
Explanations for this, along with perceptions of how long this magic spell can be maintained, tend to focus on the yen. Small and mid-cap Japanese stocks have begun 2018 doing what they did for much of last year, outperforming their bigger peers whenever the yen has climbed against the US dollar because the smaller cap names tend to have a more domestic focus. If the yen begins to slide, say the strategists, expect the Jasdaq's run to fade.
But that argument misses the more fundamental excitement around Japan's start-ups and what they represent - an economy, which after many years of making things fairly difficult for little innovators, is finding a way to express faith in them. The Olympic mascot vote may not be the finest example of it, but Japan over the past seven years has asserted its position not just as a world class producer of intellectual property, but as a skilled exporter of it since 2010. Around the time that the IP-rich Jasdaq began its great bull run, Japan has more or less doubled its annual overseas sales of intellectual property to more than 4 and 1/2 trillion yen in 2017. That, more than the currency, is what should keep the Jasdaq train in motion.