In July 2024, the Japanese yen experienced a drastic depreciation, yet the Tokyo stock market thrived, with the Nikkei 225 index even soaring to unprecedented heightsThis paradox raises a crucial question: how can the currency, often seen as emblematic of a nation's economic power, decline sharply while the stock market serves as a booming economic barometer?
To understand this phenomenon, one must first delve into the dynamics behind the stock market's remarkable riseReflecting on how the Nikkei 225 index has performed from the early 1980s to March 2024 reveals a tumultuous historyFollowing the burst of the Japanese economic bubble in 1989, the stock market plummeted, continuing its descent until 2003.
Gradually, the resolutions of bad debts within banks and corporations, coupled with a series of aggressive monetary easing policies, paved the way for a stock market rebound
However, the 2008 financial crisis reasserted its profound impact, stunting growth once more.
In 2012, Japan unveiled its “Three Arrows” economic strategy: the first aimed at radical monetary easing, introducing negative interest rates and increased money supply through central bank bond purchases; the second focused on flexible fiscal policies, emphasizing infrastructure and public works investments; and the third involved structural reforms, which encouraged private sector innovation, improved corporate governance, and attracted foreign expertiseThese measures, collectively termed “Abenomics,” ignited a resurgence in the stock market.
Correspondingly, over the past two decades, the net profit margins of companies listed in the Nikkei 225 index have seen substantial growth, rising from 2.2% in 2012 to 8.7% in 2021, indicative of enhanced corporate profitability.
Furthermore, the monetary easing strategies significantly boosted the valuations of listed companies
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Following reforms led by the Tokyo Stock Exchange in 2022, firms began prioritizing profitability, long-term returns, and overall valuationInfluential investors, including Warren Buffett, increased their stakes in the Japanese market, prompting a wave of international investors to follow suit.
Additionally, the depreciation of the yen has improved the profitability of export-oriented companiesThis confluence of factors contributes to the remarkable ascent of the Nikkei index.
Yet, the stock market's surge does not equate to a rejuvenated Japanese economy emerging from its prolonged “lost three decades.” When scrutinizing GDP growth, wages, and prices, it becomes evident that despite the stock market's robust performance, Japan's GDP has stagnated at an annual increment of around 1% or even less
Thirty years ago, Japan's per capita GDP reached $40,000 but has remained stagnant at this level.
The disparity stems from domestic demand languishing due to shrinking family consumptionThe profits that underpin the burgeoning stock market largely derive from overseas markets, failing to translate into correspondingly higher wages for employeesFurthermore, the influx of liquidity into financial markets has starved the real economy, resulting in a stark divergence between financial market inflation and real economic deflationIn essence, stock market fluctuations have minimal relevance to the everyday lives of most Japanese citizens, as wealth is concentrated in the hands of stockholders, with only marginal benefits trickling down to the broader economy.
In "Low Desire Society," author Kenichi Omae delves into these social and cultural phenomena
He asserts that following the economic bubble's burst, younger generations face mounting pressures tied to employment and living standardsThe prolonged economic stagnation has rendered efforts fruitless, exacerbated by systemic class rigidity and the entrenched lifetime employment systemThis has culminated in diminished aspirations and a societal shift towards minimalismConsequently, consumption—which is the essence of economic growth—has stagnated, stifling both investment and personal spendingThis low-desire mindset has birthed complications such as declining marriage and birth rates—issues exacerbated by Japan’s already severe aging demographic and diminishing consumer demand, mirroring challenges faced by various nations worldwide.
Economist Gu Chao Ming, in "The Economy Chased by Others," examines the macroeconomic implications further, noting that many developed economies risk falling into a low growth, low inflation "Japanification." This situation stems primarily from issues related to economic structures.
He categorizes the industrialization process of economies into three stages: the urbanization phase, akin to the industrial revolution in Europe, where rural workers flock to cities for factory jobs; the mature economic stage, characterized by labor scarcity leading to increased wages and bolstered consumption; and the stage of lagging economies, where high labor costs prompt firms to outsource low-value production functions, as evidenced by the rise of China as the "world's factory” during the 1990s, which is now shifting to Southeast Asia.
For developed economies to sustain growth, they must pivot towards innovation and the advancement of cutting-edge technologies
Historically, technological innovations have been pivotal in driving global economic growth, yet the current epicenter of advanced technology does not reside in JapanConsequently, it remains ensnared in a complex web of challenges that may prolong its economic difficulties.
Japan’s economic narrative is beset by paradoxes: a collapsing yen, skyrocketing markets, rising trade deficits, profitable companies, stagnant GDP, and stagnant wages with surging property pricesWhile the economy remains stagnant, citizens enjoy relatively high living standards, and jobs in various sectors are readily availableOver the past two decades, Japan, adhering to a strategy of international investment rather than trade, has increased its overseas assets in a bid labeled as a "three-burrows strategy" which allows for resource diversification.
Despite assessments that Japan's nominal GDP has fallen to fourth globally due to Germany's rise, it still retains a prominent position within the elite economic group