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The stock market is not the economy. Look at what’s happening in Japan.
Japan’s stock market set a new record on Thursday, with the Nikkei stock average closing at 39,098.68 yen. This is not just an all-time high, but an important psychological threshold. The original record goes back much further, being set on December 29, 1989, near the peak of the country’s bubble economy.
Shortly after, the Japanese market crashed, dropping 60% in just a few years. The economy fell into a long period of stagnation, and the country’s growth lagged behind that of other developed countries, leading to what was known as the “lost decade,” a phenomenon that became known as “Japanification.”
However, despite the recent strength in the Japanese market, other economic indicators for the country do not look so rosy. Japan fell into a technical recession last quarter after its economy contracted at an annualized rate of 0.4%. This means that GDP has declined for two consecutive quarters, whether or not economists officially call it a recession. The country has fallen in the global GDP rankings, falling to fourth place behind Germany in dollar terms.
The country faces various economic challenges. The weak yen has made Japan’s imports more expensive, hurting Japanese consumers and businesses that rely on energy, food and other goods from overseas. Japan’s population has also been declining for 14 consecutive years, with last year’s report showing the sharpest decline.
But investors don’t seem to be concerned, as strong earnings and a resurgence of attention to corporate governance are encouraging foreign investors like Warren Buffett to pile more money into the Japanese market. luck An inside look at the Japanese version of the divide between Wall Street and Main Street reveals that “not so bad” is actually a very good thing. Developed economies like Japan don’t always grow like crazy, but that’s fine.
Why is the Japanese market so strong?
“After a long and extremely lethargic performance, Japan is truly making up for lost time with its return to record highs,” said Louis Cuis, chief economist for Asia Pacific at S&P Global Ratings. . luck last week.
Toyota Motor Corp. reached a valuation of 48.7 trillion yen ($323.5 billion) last month, setting a record for the highest market valuation of a Japanese company and surpassing the record set by Japanese telecommunications company NTT in 1987.
Toyota is currently worth 57.5 trillion yen, or $381.6 billion. By comparison, NTT is worth just 16.4 trillion yen ($108.6 billion).
Foreign investors continue to pump money into Japan’s stock market, the paper reported, injecting a net $14 billion in January alone. new york times, Citing the Japan Exchange Group’s announcement.
One reason investors are optimistic about Japan is that the corporate sector is doing well. Earnings in the final quarter of 2023 rose 45% from a year earlier, according to analysts at Goldman Sachs. This is partly due to the weaker yen, making Japanese exports from companies such as Toyota cheaper overseas.
The Japanese market is also series, This is to streamline complex organizational structures.
“If you’ve ever seen a typical keiretsu structure, you’ll understand. It’s like a bowl of ramen,” Gerald van der Linde, chief Asian equity strategist at HSBC, said in late January. wrote. “These complex corporate structures often come with extra bells and whistles, such as lower returns on capital, lower dividends, and fewer share buybacks.”
This lack of dynamism is reflected in Fortune’s Global 500 list, which ranks the world’s largest companies by revenue. Since the rankings began in 1995, Japan’s presence on this list has declined significantly, with the country’s versions of Meta, Tesla, and Alibaba no longer included. Toyota Tsusho, the most recent Japanese company to join the list, has been on the Global 500 list for 15 years, making up just under half of the list.
But that is changing. “Dynamism is returning to Japan’s economy,” Morgan Stanley analysts wrote in a research note earlier this week. “Companies are achieving record profits, changing pricing behavior, and innovating new strategies to grow,” they continue.
The Tokyo Stock Exchange also plays a role. Last year, the exchange urged companies to do more to improve profitability and valuations and began scrutinizing close relationships between parent companies, subsidiaries and other cross-shareholdings.
In January, the Tokyo Exchange announced that it would begin listing companies that disclosed plans to improve capital efficiency under a “name and shame” strategy. The exchange has also proposed that companies that don’t shape up could be delisted by 2026.
What about Japan?”s economy?
But while the corporate sector looks optimistic, other parts of Japan’s economy look more volatile. Personal consumption in the final quarter of 2023 decreased by 0.2% from the previous quarter. Capital investment also decreased by 0.1% during the same period.
Japan’s declining population poses a major economic challenge in the long term. Japan’s median age is 49.1 years, compared to 38.1 years in the United States, and Japan will soon have to rely on a smaller working-age population to support its growing elderly population. Although the Tokyo metropolitan government considers this problem to be an issue that cannot be postponed, current policies are still unable to reverse the declining trend.
However, economists are cautiously optimistic that Japan may be able to reverse its long period of deflation and return to economic normalcy. Analysts say wages are rising amid a tight labor market, with major companies such as Toyota, Nintendo and Uniqlo owner Fast Retailing raising salaries last year.
Before Japan released preliminary economic data last week, many economists expected the Bank of Japan to raise interest rates in April, the first time since 2007.
An unexpected economic downturn could affect that schedule. “Recent GDP growth is definitely a bit of a setback for the outlook for interest rate increases,” Kuis suggested.
However, “if things go well, we could be on a path towards more sustained wage growth in the labor market, supporting more normal inflation and, in turn, more normalized monetary policy.” He continued.
The economist also pointed out that despite all the negative headlines about Japan over the past few decades, Japan’s economic data is “not that bad,” particularly in terms of real GDP growth per capita and hours worked per capita. He pointed out the productivity. And ultimately, observers need to be realistic about what mature economies are capable of.
“In the long term, we cannot expect real GDP growth to significantly exceed 1%,” Quys said.
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