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.