Japan's Nikkei 225 Breaches Key 40,000 Level For First Time

(Bloomberg) -- Japan's Nikkei 225 Stock Average climbed above the psychological level of 40,000 for the first time, opening the door to further gains in its historic rally.

The blue-chip gauge rose as much as 1% to 40,301.30 on Monday, a fresh intraday record. Tech shares, which have helped push shares higher over the past year, were leading the way, with Advantest Corp. among the top performers. 

The broader Topix index also arose but remains about 6% below the record it set more than three decades ago before Japan's asset-price bubble burst. Both the Nikkei and the Topix found support from US consumption data, which added to expectations that the Federal Reserve may be able to cut interest rates as early as June — a boon to global sentiment. 

“The Nikkei 225's 40,000 is certainly a key psychological level, which could offer some resistance for the index and bring volatility,” said Charu Chanana, strategist at Saxo Capital Markets based in Singapore. “But when structural factors remain in favor, and yen weakness continues, it is likely to be more a bullish signal rather than fueling any concerns of Japanese stocks being overbought.”

Read more: Record-High Nikkei's Rise Just Getting Started on Foreign Demand

The Nikkei reclaimed its 1989 peak last month as investors from around the world piled into Japan's biggest companies on improving shareholder returns, the weaker yen and booming corporate profits. 

Warren Buffett's endorsement of Japanese trading houses last year boosted confidence in the nation's market, and concerns over a slowdown in China prompted many funds to switch into Japan.

Moves in the the Nikkei had been subdued after it reached the milestone on Feb. 22, as investors took profits and some analysts voiced surprise at the speed of the rally. Yet downside was limited as investors came in to buy on dips.

Foreign investors remain bullish on Japanese stocks. BlackRock Inc., the world's biggest asset manager, and Amundi Asset Management, Europe's largest money manager, expect earnings growth and changes in corporate governance will keep the strength going.

See charts: How the Nikkei Found Its Mojo in World-Beating Rally 

Still, there are some concerns the stock market may be overheating.

“While 40,000 yen for the Nikkei 225 is a passing point, the pace is too fast and the level is reached a little too early for the economy and companies' actual performance to keep up with,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank. “The growth of the economy is a long-distance marathon, and the stock market has run so rapidly that it might lose its breath soon.”

Companies are being encouraged by the Tokyo Stock Exchange to publish reports on their plans to boost equity valuations. Some have announced share buybacks and dividend hikes. Management buyouts are on the rise and activist investors are also stepping up their campaigns. 

About a third of Nikkei companies, excluding the financial sector, have a net cash position, meaning they have more cash than debt, which bolsters the cause of activist investors and the TSE. That's around double the comparable figure for the S&P 500.

“This is not a groundless frenzy,” Masahiro Yamaguchi, a senior market analyst at SMBC Trust & Banking Ltd., citing the healthy economic and corporate backdrop in both Japan and the US.

--With assistance from Eddy Duan and Yasutaka Tamura.

(Adds latest index level, comment from strategists.)

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