The Japanese stockmarket has long been a no-go area for private investors, but the re-election of prime minister Shinzo Abe (pictured) with a substantial majority should make them think again.
Table 1 shows that those who know what they are doing have made money in this most difficult of markets, and the experience of Japan has relevance to all the ageing Atlantic economies, in particular Brexit Britain.
The lost decades
A long-term assessment shows that investors in Japan did well in the decades following the second world war, as the country recovered and set on its way to become the world’s second-largest economy behind the US. As is normal with exuberant investors, boom became bubble and then bust.
The Nikkei 225 index hit its all-time peak of nearly 40,000 in December 1989, with dozens of commentators explaining that Japan was “different” from other markets. Indeed it was. The Nikkei at one stage fell to a level equivalent to less than a 10th of that high, and even now is only trading at around 22,000. The partial recovery seen in recent years is mostly thanks to the so-called ‘Abenomics’ policies.
Although it has been almost three decades since the bubble burst, Japan is still actively battling with deflationary forces. These remain powerful, despite near-zero interest rates, repeated bouts of quantitative easing (or money printing) and constant yen-weakening currency interventions.
The cause of that deflationary pressure is simple. In any developed economy, the middle classes depend on property for their wealth. By 2004, residential real estate in Tokyo was worth just 10 per cent of the value reached during the late 1980s peak, while the most expensive land in Tokyo’s Ginza business district had fallen back to just 1 per cent of its 1989 level in the same year. Companies and individuals who trusted ‘financial engineering’ found themselves in real trouble.
To add to the misery, while the birth rate was falling, lifespans were increasing – meaning Japan was living a demographic nightmare. The result was a deterioration in the country’s competitive edge over other Asian exporters.
The years following the crash in the late 1980s became the ‘lost decades’. While Japan’s rich found themselves to be over-borrowed and under-secured, too many of the companies that employed them and had made the nation boom had become ‘zombies’ – kept alive only in order to keep their banking centres solvent.
Consensus and technology
Moreover, Japan is a consensus society. Nothing changes except at the pace of the slowest, and this attitude was reinforced by the iron triangle of state, bank-focused corporate families and the politics that had transformed the country after 1945. It took nearly two decades before the bankruptcy of the entire banking system was recognised and resolved.
Corporate break-ups followed banking restructuring, newly empowered shareholders began to demand better corporate governance, and small companies found the space to grow and recruit the brightest graduates.
Fortunately, technology occupies a central place in the consciousness of the Japanese. Despite the traumas of Hiroshima and Nagasaki, postwar Japan realised it could only embrace technology, not dread it.
Through extensive cultural and spiritual indoctrination from writers, teachers and the government, technology for the Japanese became less an alien appendage than an extension of man, helped by the Shinto belief that everything – active or inert – has a soul.
Japanese culture mass-produced popular works that reflected technology’s benign presence. The robot ‘child’ named Astro Boy instantly became a cultural icon as a figure that embraces both scientific know-how and human frailty.
In addition, to pick up a theme touched upon last month, manga and anime comic books also portray technology as an instrument of salvation. Hence the adoption of both robots and artificial intelligence to resolve the shortage of labour within factories and care homes has been welcomed, not feared.
It is not only the Japanese that are beset with consensus and conventional thinking. It happens to all of us, and especially so to those who live or work within societies and companies with strong cultural identities. The problem is that most do not realise how their thinking is so constrained by those identities. This means that certain questions cannot be asked, since to do so is to raise doubts about self-identity. As an example, the current UK government cannot ask itself whether austerity is justified, even though it has not worked over the past decade, nor shows any sign of working, since that is to question the whole rationale of government. It is especially true of fund management, an activity that relies at least as much on self-belief as it does on analysis.
So often the large, hierarchic structure of the typical fund management firm – as part of a larger financial services group – fails to outperform the less-well endowed but freer partnership structures, which are able to think outside the box. This is certainly the case with the Baillie Gifford partnership, given its two outperforming funds in Table 1, and may ultimately prove to be the case for Asian specialist Coupland Cardiff and its recently launched Japan Income and Growth trust.
Recovery of hope
A love affair with technology has encouraged ‘system disrupters’ among the many new Japanese small and medium-sized enterprises. Some of these have western-educated founders, and many are now finding willing buyers among Chinese firms that are discovering their wage bills rising faster than they would like, or than their overseas markets can afford. Big or small, for the moment company valuations are reasonable, and shareholder pressure is encouraging dividend growth, as well as cash conservation.
Mr Abe, regarded by many in Japan as right wing, has views that many in the West would consider quite normal – a desire for greater gender equality and more women in the workplace, less business regulation and greater competition.
Demanding a revision of Japan’s famous peace constitution is only ending the hypocrisy of the country being obliged to label its military as ‘self-defence forces’ despite these units being a match for most western armies.
Such attitudes, as well as the prime minister’s plans to raise the birthrate, have brought back hope to Japan, and consumer demand is on the rise. Mr Abe’s unexpected success in the election, which granted him a sufficient majority to change the constitution, suggests that it is not only he that wants an end to the lost decades.
Hope is the fuel that sparks economic growth, and we should all take note of that.
