The Tokyo stock market's Nikkei index may have a limited upside after surpassing the 30,000 threshold for the first time in 20 months, weighed down by fears of a possible global recession later in the year.
The benchmark Nikkei Stock Average finished at 30,093.59 on Wednesday, the highest close since Sept. 28, 2021, following the broader Topix index's rise to its highest level in 33 years the previous day.
Led by foreign tourists, market participants expect a pickup in consumer spending after the removal of COVID-19-related border controls in Japan. The Bank of Japan has also maintained its commitment to monetary stimulus amid the sustained weakness of the yen, shoring up the Japanese economy.
Still, market analysts say it remains unclear whether the Nikkei index can maintain its upward momentum, as its outlook is clouded by a possible recession in the United States and Europe.
Aggressive monetary tightening by the U.S. Federal Reserve and the European Central Bank in the fight against stubbornly high inflation is threatening to push the global economy into a recession in the latter half of the year, analysts say.
In the short term, the Nikkei's upside could be capped at around 30,700, close to a previous high set on Sept. 14, 2021, said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co.
The index ended up 480.34 points at 30,573.93 on Thursday after briefly rising to as high as 30,667.13.
Concerns over the spillover effect of recent U.S. bank failures and uncertainty over negotiations on the U.S. debt ceiling between Congress and the White House will also leave market players cautious about chasing the upside.
"With short-term risks, such as the U.S. debt ceiling, to longer-term ones, such as fears of financial instability following the U.S. bank failures," there is a myriad of external factors that need to be considered, Maki Sawada, strategist at Nomura Securities, said.
The fast-paced gains of the Nikkei, which has risen more than 15 percent since the beginning of the year, will also likely prompt market players to take profits for the time being.
Recent earnings reports show the market rally has been driven by solid outlooks and profit growth at many companies.
The yen's weakness is boosting exporters' returns and the BOJ's persistent monetary easing policy helps companies borrow money at lower costs, while retailers and transportation companies are benefitting from a revival in consumption by foreign travelers.
Government data showed Wednesday that Japan's economy grew at an annualized 1.6 percent in the January-March quarter, the first expansion in three quarters, aided by strong private consumption and a recovery in inbound tourism.
A recent media report that said billionaire investor Warren Buffet sees opportunities to invest more in Japanese stocks and companies' incentives to buy back their own shares also improved market sentiment.
"The rise in Japanese shares has been supported mainly by domestic trading cues, and comes in spite of headwinds in other global stock markets," Sawada said.
But investors will need further incentives to be convinced toward pushing the Nikkei index up from its 20-month high, analysts say. The United States will need to demonstrate that its economy is resilient, and Japanese companies will have to show more commitment to their shareholders.
"Companies will need to show that the recent announcements on share buyback plans are not a one-time occurrence, but are long-term," Chihiro Ota, assistant general manager of investment research and investor services at SMBC Nikko Securities, said.
The Tokyo market could enter a correction stage in the summer when trading typically becomes thin for the summer holidays.
"The (summer) period will allow the market to cool off for a while, and allow market participants to gauge the economic situation in the United States," Ichikawa at Sumitomo Mitsui DS Asset Management said.