From Laggard to Leader: The Resurgence of Japanese Stocks

Why Japanese Stocks Are Soaring to Record Highs

Japanese stocks are suddenly soaring, with the Nikkei 225 hitting an all-time high this week after decades of languishing. The benchmark index has gained more than 20% this year, outperforming its regional and global peers. What is behind this remarkable rally, and can it last?

There are several factors that are contributing to the surge in Japanese stocks, such as:

• The economy. Japan has recovered from the pandemic-induced recession and is expected to grow by 3.6% in 2024, according to the International Monetary Fund. The country has also benefited from the global demand for its exports, especially in the technology and automobile sectors.

• The weak yen. The Japanese currency has depreciated against the US dollar and other major currencies, making Japanese products more competitive and boosting the earnings of exporters. A weaker yen also increases the value of overseas profits when converted back to yen.

• The corporate governance reform. Japan has made significant progress in improving its corporate governance standards, such as increasing the number of independent directors, enhancing shareholder rights, and promoting more efficient capital allocation. These reforms have attracted more foreign and domestic investors, who see improved returns and growth potential in Japanese companies.

• The Warren Buffett effect. The legendary investor and his company, Berkshire Hathaway, have increased their stakes in five major Japanese trading companies, namely Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. This move has signaled confidence and optimism in the Japanese market and has inspired other investors to follow suit.

• The activist investor interest. Japan has also seen a rise in the activity and influence of activist investors, who seek to unlock value and improve performance in underperforming or undervalued companies. Some notable examples include Elliott Management, which has pushed for changes at SoftBank and Unizo Holdings, and Third Point, which has targeted Sony and Seven & i Holdings.

These factors, along with the low valuations and high dividend yields of Japanese stocks, have created a favorable environment for the Japanese market to outperform its regional and global peers. However, there are also some risks and challenges that could hamper the momentum, such as the slow pace of vaccination, the political uncertainty, and the potential trade tensions with China and the US. Therefore, investors should be cautious and selective when investing in Japanese stocks.

How Capital Influx Can Boost Japan’s Economic Recovery and Performance

The capital influx can help Japan’s economy in several ways, such as:

• Stimulating consumption and investment: The capital influx can increase the wealth and income of households and businesses, which can boost their spending and investment. This can create a positive feedback loop of domestic demand and income/employment, which can support the economic recovery from the pandemic-induced recession.

• Enhancing productivity and innovation: The capital influx can encourage Japanese companies to improve their efficiency and profitability, as well as to invest more in research and development, digitization, and green technology. This can enhance their productivity and innovation, which can increase their competitiveness and growth potential in the global market/

• Promoting structural reforms and social transformation: The capital influx can pressure Japanese companies to adopt better corporate governance practices, such as increasing the number of independent directors, enhancing shareholder rights, and promoting more efficient capital allocation. This can improve their transparency and accountability, as well as their responsiveness to the social and environmental challenges, such as climate change, income inequality, and rural-urban disparities.

The capital influx can also have some challenges and risks, such as:

• Causing asset bubbles and volatility: The capital influx can inflate the prices of Japanese stocks and other assets, which can create bubbles and instability. The capital influx can also be reversed or withdrawn quickly, depending on the changes in the market conditions and expectations, which can cause volatility and shocks to the Japanese economy.

• Exposing vulnerabilities and imbalances: The capital influx can expose the weaknesses and imbalances of the Japanese economy, such as the high public debt, the low inflation, and the aging population. The capital influx can also widen the gaps and disparities among sectors, regions, and groups, which can undermine the social cohesion and harmony of the Japanese society.

Therefore, the capital influx can be a double-edged sword for Japan’s economy, which can bring both opportunities and challenges. The key is to manage the capital influx wisely and effectively, by balancing the benefits and costs, and by addressing the underlying issues and problems. The Japanese government and the Bank of Japan have important roles to play in this regard, by providing appropriate fiscal, monetary, and regulatory policies, as well as by facilitating dialogue and cooperation among stakeholders. The capital influx can be a catalyst for Japan’s economic recovery and performance, but it is not a panacea. It requires vision, strategy, and action to make the most of it.

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