Store owner Hiromichi Akiba works at his supermarket in Tokyo on February 16. While swelling corporate coffers are enriching global investors. Japanese workers face stagnant wages. Photo: Reuters
Opinion
The View
by William Pesek
The View
by William Pesek
Japan’s split-screen economy: roaring stocks and shrinking GDP
The Japanese economy is a study in contrasts, with a soaring stock market and record corporate profits set against stagnant wages and shrinking GDP
Decades of prioritising a weak yen over structural reform have deadened Japan’s animal spirits and hurt its attractiveness as an investment destination
If ever there was proof that a nation’s economic health and stock market dynamics are two entirely different things, it’s present-day Japan.
As the Nikkei 225 Stock Average soars to the highest since 1989 – the height of Japan’s “bubble economy” era – gross domestic product is cratering. After shrinking 3.3 per cent in the July-September period year on year, it contracted another 0.4 per cent in the fourth quarter.
The government is trying to spin this as a “technical” recession. That’s Tokyo-speak for “no big deal”, yet there is little cause for optimism when you look at the breakdown of Japanese GDP in late 2023.
The data depicts weakness in consumption, capital expenditure, public investment and home sales. The downshift in China, Japan’s top trading partner, does not augur well for exports going forward. All this complicates the Bank of Japan’s (BOJ) plan to raise interest rates.
Not long ago, economists were certain the BOJ would exit quantitative easing (QE) and raise rates as soon as March. That calculus is changing as recession risks deepen and China’s economy slows. Markets are also realising that the US Federal Reserve won’t be cutting rates as quickly as hoped, meaning global bond yields may remain elevated. As such, the idea of BOJ tightening is becoming fanciful.
As these debates play out, Japan’s economic challenges make for a tantalising split screen with a stock market testing 35-year highs. On one screen is a once-in-generation equity rally capturing global investors’ imaginations.
Pedestrians study an electronic stock board showing the Nikkei 225 Stock Average outside a securities firm in Tokyo on February 16. Japanese stock prices are within sight of a historic peak reached during the nation’s economic heyday in 1989 as global investors return in droves. Photo: Bloomberg
On the other is an economy stumbling because a succession of governments – including the current one led by Prime Minister Fumio Kishida – failed to raise Japan’s competitive game. The main reason cited for the Nikkei’s 28 per cent surge in 2023 and more than 14 per cent gain so far this year is corporate governance reforms implemented since 2014.
In the past decade, Kishida’s Liberal Democratic Party imposed a UK-style stewardship code on Japan Inc. Kishida’s mentor Shinzo Abe began the process of prodding business leaders to increase returns on equity, diversify boardrooms and give shareholders a louder voice.
By August 2020, the upgrades prompted Warren Buffett to make his first Japan investments. Buffett’s Berkshire Hathaway bet big on cash-rich trading companies Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Last June, he raised his stakes to an average of more than 8.5 per cent.
This “Buffett effect” helped set the stage for a Nikkei boom, putting Tokyo in global headlines for all the right reasons and offering some much-needed counter-programming to Japan’s latest recession.
Japan has been locked in a weak-to-negative-growth cycle since the late 1990s, a legacy of the nation’s bad-loan crisis. In 1999, the BOJ cut interest rates to zero. In 2000 and 2001, it pioneered QE.
Since then, a dearth of moves to modernise labour markets, reduce bureaucracy, rekindle innovation, alter tax incentives, empower women and reduce Japan’s reliance on exports left the economy susceptible to myriad stop-start growth cycles. This also goes for the past decade of “Abenomics”. Rather than implement the structural reforms he promised, Abe left economic management to the BOJ.
As the central bank turbocharged QE, the yen plunged. That, along with shareholder-friendly policies, generated record corporate profits. Yet none of these trends boosted incomes enough to catalyse a virtuous cycle of increased consumption.
This presents its own split screen. On one, swelling corporate coffers are enriching global investors. On the other, average workers face stagnant wages at home. All these divergent storylines prove is that 1980-style “trickle-down economics” still doesn’t work.
03:17
Japan beef bowls and coffee costing more as workers feel the pinch from food price hike
Japan beef bowls and coffee costing more as workers feel the pinch from food price hike
The question is, when will these conflicting narratives intersect, or even collide? There are valid reasons to worry that the Nikkei bulls have already charged well ahead of the economic fundamentals underpinning the market.
Governance tweaks to prod companies worth less than book value to do better are nice. But what about fresh moves to increase productivity, welcome greater disruption or take risks? Silence from Team Kishida.
What Japan is realising is that decades of prioritising a weak yen over structural change deadened its animal spirits. Unlimited BOJ cash and an undervalued exchange rate took the onus off policymakers to do heavy lifting on reforms. It reduced the urgency for CEOs to restructure, increase competitiveness and innovate.
The cost of Tokyo’s obsession with a weak yen became clear last week when data showed Japan had fallen behind Germany in GDP terms. Dropping to fourth place globally is a blow to the collective Japanese psyche.
01:58
American tourists flock to Japan to take advantage of weak yen, strong US dollar
American tourists flock to Japan to take advantage of weak yen, strong US dollar
It’s a smaller blow than China wrestling second-largest economy status away from Japan, but losing further ground in the league table won’t help Japan’s global soft power. Speculation that India will also surpass Japan’s GDP in a few years adds to the headaches for Kishida, who ended 2023 with a 17 per cent approval rating.
Could this be the wake-up call Tokyo needs to regain the reformist momentum? Let’s hope so. Kishida, like Abe before him, knows what Japan needs to do. He has put forward several good ideas to level playing fields in constructive ways.
One involves a “new capitalism” push to increase incomes for middle-class families. Another is tapping the US$1.5 trillion Government Pension Investment Fund to finance entrepreneurs and pull more investment Japan’s way.
Time is not on Tokyo’s side to reassure foreign investors that upgrades during the past decade were not an aberration and that Japan’s animal spirits are being awoken. If Japan doesn’t get busy, global capital will move on to more dynamic pastures.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”
