The stock market is not the economy; just look at what is happening in Japan.
Japan’s stock markets hit a record high on Thursday, when the Nikkei 225 closed at 39,098.68. It’s not just an all-time high, but an important psychological threshold: The original record was set on December 29, 1989, near the peak of the country’s economic bubble.
The Japanese market collapsed soon after, falling 60% in just a few years. The economy entered a prolonged recession, leading to what has been called the “Lost Decade,” as the country’s growth lagged behind that of other developed economies, a phenomenon that even became known as “Japanification.” .
However, despite the recent bull run in Japanese markets, the country’s other economic data does not seem so rosy. Japan fell into a technical recession last quarter, after its economy shrank 0.4% at an annualized rate, meaning it had two consecutive quarters of declining GDP, regardless of whether economists officially call it a recession. It also fell one place in the global GDP rankings, falling to fourth place behind Germany in dollar terms.
The country faces a series of economic challenges. A weak yen is making Japanese imports more expensive, hurting Japanese consumers and businesses that depend on foreign energy, food and other goods. Japan’s population has also shrunk for 14 consecutive years, recording its steepest decline last year.
But investors don’t seem to care, as strong profits and a renewed focus on corporate governance are encouraging foreign investors like Warren Buffett to pile up funds in Japanese markets. Fortune He looked under the hood of Japan’s version of the Wall Street/Main Street divide and discovered that “not so bad” can actually be very good. A developed economy like Japan’s isn’t always going to grow like crazy, and that’s more than okay.
Why are Japanese markets doing so well?
Japan’s return to record levels is really making up for lost time “after a long and rather lethargic performance,” Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings, told Louis Kuijs. Fortune last week.
Last month, Toyota Motor set a record for the highest market valuation for a Japanese company when it reached a valuation of 48.7 trillion yen ($323.5 billion), surpassing the record set by Japanese telecommunications company NTT in 1987. .
Toyota is worth 57.5 trillion yen today, or $381.6 billion. NTT, by comparison, is worth just 16.4 trillion yen ($108.6 billion).
Foreign investors continue to pour money into the Japanese stock market, pumping in a net $14 billion in January alone, according to the New York Times, citing Japan Exchange Group.
One reason for investor optimism about Japan is a stronger business sector. Earnings for the final quarter of 2023 were up 45% year over year, according to Goldman Sachs analysts. This is partly due to the weak yen, which makes Japanese exports from companies like Toyota cheaper abroad.
Japanese markets are also boosting the country’s expanding conglomerates, known as keiretsu, to rationalize its complicated organizational structure.
“Anyone who has seen a typical keiretsu corporate structure will understand: it looks like a bowl of ramen noodles,” Herald van der Linde, HSBC’s chief equity strategist in Asia, wrote in late January. “These complex corporate structures often come with additional seasonings: weak return on equity, low payouts and fewer share buybacks.”
That lack of dynamism is reflected in Fortune’s Global 500 list, which ranks the world’s largest companies by revenue. Japan’s presence on the list, which has shrunk significantly since the ranking’s inception in 1995, does not include the domestic version of Meta, Tesla or Alibaba. The most recent Japanese company to join the list, Toyota Tsusho, has been a Global 500 company for 15 years, just under half of the list’s existence.
But that is changing. “Dynamism is returning to the Japanese economy,” Morgan Stanley analysts wrote in a research note earlier this week. “Companies are making record profits and are changing their pricing behavior, in addition to innovating new strategies to grow,” they continue.
The Tokyo Stock Exchange is also doing its part. Last year, the exchange asked companies to do more to improve profitability and valuations, and began examining the close relationships between parent companies, subsidiaries and other cross-holdings.
In January, the Tokyo Stock Exchange said it would take companies public that revealed plans to improve capital efficiency in a “naming and shaming” strategy. The exchange has also proposed that companies that do not improve could be delisted by 2026.
What about Japan?yes economy?
But while the business sector appears optimistic, other parts of the Japanese economy appear more unstable. Private consumption fell 0.2% in the last quarter of 2023, compared to the previous quarter. Business investment also fell 0.1% during the same period.
Japan’s declining population also poses a significant long-term economic challenge. The country’s median age is 49.1, compared to 38.1 in the United States. Japan will soon need to rely on fewer working-age people to support a growing elderly population. Tokyo has considered the issue “a challenge that cannot be postponed,” but current policies have not yet reversed the decline.
However, economists are cautiously optimistic that Japan could reverse long-term deflation and return to a more normal economy. Analysts point to rising wages amid a tighter labor market, with big companies such as Toyota, Nintendo and Fast Retailing, which owns Uniqlo, raising wages last year.
Many economists, before Japan released preliminary economic data last week, expected the Bank of Japan to raise interest rates in April, the first hike since 2007.
The surprise recession could affect that schedule. “The recent GDP growth figures are definitely a setback to the prospect of interest rates rising,” Kuijs suggested.
However, “if things work out well, we could be on the path to more sustained wage growth in the labor market, underpinning more normal inflation and therefore more normalized monetary policy,” he continued.
The economist also noted that, despite all the negative headlines about Japan in recent decades, its economic data is “not that bad,” pointing to real growth in GDP per capita and productivity per labor hour per person in particular. And in the end, observers should be realistic about what a mature economy can do.
“Don’t expect much more than 1% real GDP growth in the long term,” Kuijs said.
