In an unexpected turn in the financial landscape of Asia, Japan's stock market has recently emerged from a three-decade slump, showcasing a remarkable upward trajectory. The Nikkei 225 index has invigorated market watchers, with some declaring the resurgence of a bull market. However, one might argue that the Shanghai Composite Index remains poised to make an even more significant leap, being still comfortably positioned in what appears to be a half-way rise towards its peak.

This recent revitalization, currently heralded as the "once-in-a-decade bull market," comes after years of economic stagnation that left the Japanese markets floundering. As of last Thursday, the Nikkei 225 index achieved a consecutive six-day rally, closing at an impressive 30,573.9 points. This marks a staggering rise of over threefold from its nadir back in October of 2008, although it still sits about 21.5% below the historical high of 38,957 points recorded back in 1989.

Several key factors underscored this sudden market strength: robust fundamentals, an influx of foreign investment, and a wave of share buybacks. Nonetheless, it is crucial to approach the "bull market" claims with caution, as the exuberant heights experienced 33 years ago may be challenging to replicate. Notably, the market capitalization of the Japanese stock market during the 1989 bubble accounted for 42% of the global stock market, a figure that has since dwindled to approximately 7% today.

The past fourteen years shed light on Japan's stock market dynamics. Influential policy measures from the Bank of Japan have played a pivotal role in this rebound. Beginning in September 2002, the Bank of Japan initiated direct purchases of shares held by Japanese commercial banks, amassing over ¥20 trillion (around USD 150 billion) by September 2004. This move marked the beginning of a journey that ultimately aimed to address the issue of bank non-performing loans. In 2011, the introduction of Abenomics propelled the Bank of Japan to commit to purchasing up to ¥6 trillion per year in exchange-traded funds (ETFs). Currently, it holds around ¥37 trillion, accounting for about 5% of the total market capitalization of the Tokyo Stock Exchange.

With the Bank of Japan providing a safety net, the Tokyo Stock Exchange has responded to calls for companies trading below book value to implement plans for capital improvement. Major corporations like Hitachi, Fujitsu, and Mitsubishi have laid out share repurchase initiatives. The recent endorsement from renowned investor Warren Buffett has further catalyzed interest in Japanese equities, as he strategically issued low-interest yen-denominated bonds to purchase shares. This approach has attracted a record influx of net foreign purchases in April, totaling around USD 22 billion.

Buffett's investment strategies suggest that there might be sound reasoning behind the increased interest in Japanese stocks, particularly as investors seek a hedge against potential risks within the U.S. stock market. While the Nikkei index has soared by 17.2% this year, its performance pales in comparison to the nascent bull run of the Nasdaq, which has seen a 20% increase. This divergence raises questions about the broader implications for the global financial ecosystem.

The unsettling backdrop includes the looming risk of a U.S. debt default, with the federal debt reaching a statutory ceiling of USD 31.4 trillion. If Congress fails to raise this limit, the Treasury could run out of funds by June 1. A potential default could have disastrous consequences, reminiscent of the 2008 financial crisis, but perhaps with even graver implications. Economic advisors at the White House have suggested that a prolonged default could send the stock market into a nosedive of 45%, accompanied by a staggering GDP decline of 6.1%.

However, such predictions are laced with political undertones and do not wholly align with historical data. Recent analysis from Goldman Sachs indicates that since 1980, past government shutdowns have had minimal impact on the performance of the S&P 500 index. In fact, the average change in the index before, during, and after a shutdown has shown only marginal fluctuations. During the longest shutdown in U.S. history, which lasted 35 days from December 21, 2018, to January 25, 2019, the S&P 500 increased by 8% despite the uncertainty.

Nevertheless, the current political dynamics suggest that outcomes may diverge significantly from the market consensus. This could indeed drive investors like Buffett to bolster their investments in Japanese stocks merely as a precaution against unforeseen systemic risks in the U.S. market.

The quest for stability and growth has also led investors to explore high-dividend-paying stocks, which have emerged as a new focal point within the market landscape. Although Japan's stock market once faced a catastrophic collapse due to declining corporate earnings and valuations, the long-term prospects indicate a strong correlation between stock market performance and GDP growth. In 1995, the per capita GDP for America and Japan were $28,700 and $43,400, respectively; as of last year, these figures changed to $76,000 for the U.S. and $33,800 for Japan, indicating a tremendous shift in economic strength dynamics.

Today, we are faced with a haunting reminder of the bubbles that once inflated. The per capita GDP of Japan in 1995 was 1.5 times higher than that of the U.S., a clear indicator of an unsustainable bubble at the time. Jump ahead to 2022, and America’s GDP per capita is now 2.25 times that of Japan, not to mention almost six times that of China. This begs the question: is the current scenario an even larger bubble?

As currency dynamics play out, with the dollar appreciating against the yen by 1.33% in the first quarter, and Japan witnessing a modest 0.4% growth in GDP against a 3.2% decline in exports, it raises concerns about the future viability of its trade-dependent economy. Many industry veterans acknowledge that the gains witnessed in Japan's stock market are more akin to what renowned value investor Benjamin Graham termed a "cigarette butt" market—where investors pick up small profits without the prospect of substantial returns. A concerning 54% of stocks listed on the Tokyo Stock Exchange are priced below their book values—far exceeding the meager 7% of the S&P 500 stocks found in a similar position.

Looking ahead, the potential for recovery exists not just within Japan but also in China's A-share market. The current environment indicates that if Japan can resurrect its market spirit, then surely A-shares won’t lag behind. Recent announcements from major investment firms like Harvest Fund Management and GF Fund reveal plans for ETF offerings centered on state-owned enterprises, paving the way for significant capital flows into this sector. The ongoing trend of declining interest rates further solidifies the appeal of high-dividend sectors, which have become the darlings of the market, posting gains exceeding 20% this year, far outpacing the Shanghai Composite Index's modest 6.73% growth.