Issue:
March 2024 | Deep Dive
Do sky-high shares mean Japan is on the verge of an economic renaissance?
Moderating a recent FCCJ Deep Dive event on Japan’s economy felt more like refereeing a boxing match than chairing a discussion.
The two speakers, the economist and author Richard Katz and the veteran Japan analyst Jesper Koll, were clearly on different sides on the question of whether Japan is on the verge of a renaissance as a leading economic power and global financial player, or stuck in the mud of stagnation. Once their sparring had ended, I deemed it wise to declare a draw.
The event was held at a time when Japan appeared to be flying high in international financial and stock markets, with the Nikkei 225 stock average recently hitting a record high of 39,098.68, compared with its previous peak of 38,915.87 in 1989, at the height of the bubble economy.
Katz is the author of a recently published book The Contest for Japan’s Economic Future – Entrepreneurs Versus Corporate Giants, in which he argues that the fact that Japanese stock prices are once again flying high “does not mean that Japan is back”.
Its stocks may have climbed around 70% since 2018, but Japan’s GDP has scarcely budged during this time, while real (inflation-adjusted) wages have declined slightly, Katz said. Japan has a long way to go, he added, before it becomes the land of innovation and entrepreneurship that Koll and others are claiming.
Productivity in Japan has fallen behind that in other advanced economies, and there is need for a “better balance in the country’s corporate structure between giants and entrepreneurs with fresh ideas”, Katz said.
In addition, Japan has the lowest share of entrepreneurs among 25 leading countries, said Katz, senior fellow at the Carnegie Council for Ethics in International Affairs. Corporate Japan, he added, is “stuck in the analog era” and has yet to acquire the digital maturity of other countries.
As if to add to Katz’s list of indictments, the Cabinet Office announced on February 15 that Japan is no longer the world’s third-biggest economy, having been overtaken by Germany, with the U.S. and China occupying first and second place.
This is largely the result of the yen's weakness, which means that Japan’s GDP automatically shrinks when measured in dollars. Even so, it hardly supports the view of Japan as a growing and dynamic economy. On the contrary, the country is now technically in recession.
The more pessimistic view of Japan’s economic prospects was reinforced by the IMF’s annual Article 1V consultation report, released on February 9, which forecast that its GDP growth would decline to just 1% this year from 1.9% in 2023.
The report was noticeably less euphoric about Japan’s economic prospects than financial analysts such as Koll, who has long been a self-declared “Japan optimist”. He maintained and expanded this determined optimism during the Deep Dive event, declaring Japan a “fantastic investment opportunity”.
Japan is “at the forefront of every global investor’s thinking now”, Koll said. Economic value is being created in the country and “the corporate elite is on the move. Bureaucrats are quitting government ministries and going to start-up ventures, and a new generation of CEOs is emerging”, he added.
While corporate sales in Japan have grown just 1.1 times in the past decade, corporate profits have expanded 11 times, Koll said. Management buyouts of companies are on the up and up, while share buybacks by companies are popular, raising investor returns in the process. Returns on financial assets will rise further in the future under the impetus of determined corporate reforms, and Japan will be “pulled out of the value trap”.
Japan is “a fantastic opportunity for asset managers,” said Koll, a former JP Morgan and Merrill Lynch analyst who is now a roving ambassador for FinCity Tokyo, a public-private organisation that promotes Japan’s financial and asset management sectors.
His enthusiasm echoes that of fellow FinCity ambassador David Semaya, executive chairman and representative director of Sumitomo Mitsui Trust Asset Management, who claims that international investors now have “an unbelievable interest” in Japanese stocks.
Judging from the sharp divergence of views at the Deep Dive and the story that official data is telling on Japan’s economic and financial prospects, some of this investor interest, which borders on euphoria, is a little premature.
Anthony Rowley is a columnist and contributor for the South China Morning Post.
