Is the Land of the Rising Sun Rising Again? Narrative on Japan Changing

By Rick Bettger, MBA

You might have to go all the way back to the 1980s to see a headline like the one that ran in the Wall Street Journal on October 4: “Japan is the most exciting market in the world.”[i]  With the Nikkei 225 hitting 33-year highs over the summer and closing out October up more than 20% year to date in yen terms, Japanese stocks are flipping the low/no-growth script international investors became accustomed to over the past few decades.

By way of background, Japan’s post- World War II economic growth was nothing short of miraculous given the degree of rebuilding required.  State-assisted capitalism, a surplus of well-educated workers, and a stable political situation with low military costs were just a few of the factors that helped the country recover quickly and grow rapidly into the world’s second largest economy.[ii]  That growth peaked on December 29, 1989, when the Nikkei 225 closed at 38,195, its all-time high.

Things changed dramatically when the Bank of Japan (BOJ) raised interest rates in the early 1990s.  Twin equity and real estate bubbles burst and threw the country into a deep recession.  The BOJ tried to stimulate the economy by implementing easy monetary policy featuring low or zero interest rates, but an extended deflationary environment took hold and the spiral of falling wages, appreciating yen, and surging government debt made it difficult to normalize policy.[i]  Additionally, Japan faced a number of hurdles in the ensuing years – increased global competition, economic disasters such as the great financial crisis, and the demographic challenges presented by having the world’s oldest population supported by a birth rate of only 1.3 – that contributed to muted growth and what some would call a “lost 30 years.”

In contrast, the growth seen in 2023 has been anything but muted and it’s sparking conversations amongst investors that haven’t happened in a long time.  In drawing from those conversations, there appears to be several underlying factors to the recent surge that suggest Japan could be on a path to more sustainable growth in the longer term.

Structural Changes in the Tokyo Stock Exchange

The Tokyo Stock Exchange (TSE) made a splash in late March when it finalized market restructuring rules designed to encourage better corporate governance, improve relations with investors, and promote sustainable growth.  These goals may sound familiar to many international investors:  Abenomics, introduced by the late Japanese Prime Minister Shinzo Abe a decade ago, also sought to spur growth through a combination monetary policy, government spending, and structural reforms, including improved corporate governance.

As part of the changes, the TSE called on listed companies with price-to-book (P/B) ratios of less than one to either present plans for improving their business or explain the situation to investors.  Non-compliant companies could face de-listing as early as 2026.




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