Back to the Future: The Nikkei 225 Just Hit an All-Time High; So What?
Take a look under the hood of the Japanese economy to get a balanced view of what this milestone may mean relative to the end of the “bubble economy” of 1989.
What’s new: On February 22, 2024, the closing price of the Nikkei Stock Average surpassed the record high of 38,915.87 yen set on December 29, 1989, the peak of the bubble economy. This was the first time in 34 years.
Why it matters: The Japanese economy has been stagnant for a long time since the bursting of the bubble economy, but domestic inflation since 2022, triggered by historic global inflation, has prompted companies to raise prices and wages. Even with inflation, corporate earnings are performing well, and expectations are high for a complete break from the longstanding "deflationary economy."
While the recent rise of the Nikkei Stock Average above its bubble peak reflects some success in the globalization of Japanese companies, it is important to recognize that the Achilles heel of weak domestic investment and domestic demand remains. A big question is whether recent wage increases by Japanese companies, which were prompted by surprise inflation, will continue in the future.
By the numbers: A lot has changed since the go-go years of Japan's bubble economy in the late 1980s, or has it? As always, the devil is in the details.
Market Capitalization: The market capitalization of the Tokyo Stock Exchange ("TSE") as a whole has long since surpassed its bubble-era peak. According to the Japan Stock Exchange, TSE market capitalization at the end of 2023 was 931 trillion yen, more than 300 trillion yen higher than the 611 trillion yen at the end of 1989. TSE market capitalization reached 620 trillion yen at the end of May 2015 during the Abenomics era, the first time it temporarily exceeded the bubble-era peak, and it has remained almost constantly above this level since mid-2017, except for the crash caused by the global pandemic. This is not surprising by considering the increase in the number of companies listed on the TSE from only 1,752 firms in 1990 to 3,933 in 2023.
Despite the government's call to "shift from saving to investment," the attitude of households toward financial assets, which are mainly cash and deposits, does not seem to have changed much. - Akihiro Nomura, Editorial Columnist, Toyo Keizai
Market Capitalization per Listed Company: Conversely, the current market capitalization per listed company is about 30% lower than at the peak of the bubble economy. The primary reason is the change in the denominator; There are now double the number of listed companies. From 1989 to the present, the total market capitalization of stocks and mutual fund shares held by households has increased by about 1.5 times. This is almost the same as the increase in the market capitalization of the TSE during the same period.
Total National Wealth: Real estate prices soared along with stock prices at the height of the bubble economy, but recent gains have been more modest than the performance of the TSE. According to the Cabinet Office, between 1989 and 2022, the total stock of the value of all national assets increased from 3,231 trillion yen to 3,999 trillion yen, an increase of about 1.2 times. However, a breakdown of this figure shows that the value of land, on the contrary, has continued to decline from 2,266 trillion yen to 1,309 trillion yen. Thus, the value of land is still 40% lower than it was at the height of the bubble economy. Even if we say that the bubble period has passed its peak, it is only in terms of stock prices.
What has been restored is the "financial rich", not the "land rich."
Furthermore, the biggest factor in the increase in national wealth during this period was the large increase in productive assets, which consist of production facilities and inventories. Between 1989 and 2022, these assets increased 2.5 times, from 914 trillion yen to 2,260 trillion yen.
The economic value added per unit of productive assets has decreased, and this low value-added productivity is the root of the problems with the Japanese economy. - Akihiro Nomura, Editorial Columnist, Toyo Keizai
Nominal Gross Domestic Product (GDP): In 2023, it was 591 trillion yen, 5.7% higher than the previous year, partly due to inflation (real GDP growth excluding the effect of inflation was 1.9% higher than the previous year), about 1.4 times higher than the 410 trillion yen in 1989. The reality is that this low growth has itself been supported by an increase in the employment rate of women and the elderly. Although Japan's working-age population (15-64 years old) peaked in 1995 and has been declining ever since, the number of workers in 2023 was greater than in 1989. While the participation of women entering the workforce (as measured by government statistics) and the positive effect of people working well beyond the traditional age of retirement at age 60 have caused an overall increase in the number of workers, these effects will eventually run their course and will not last forever.
Distribution of GDP: First, employer compensation, the wages received by households, has grown about 1.4 times between 1989 and 2022, about the same as nominal GDP. The big change is in the profits distributed to corporations. When considering high or low stock prices, stock investors often refer to the price-earnings ratio (P/E), which is a company's market capitalization divided by its net income. In this way, investors infer whether a company's stock price is overvalued or undervalued based on how many times the company's market capitalization is divided by its net income. This corresponds mainly to profits earned from foreign direct investment (e.g., construction of overseas factories) by Japanese companies. From the perspective of consolidated financial results, which determine stock prices, it is necessary to include the profits of overseas subsidiaries. Therefore, the sum of these primary income receipts and operating surplus must be considered as consolidated corporate profits. Primary income receipts reached 55 trillion yen in 2022, significantly surpassing the 16 trillion yen recorded in 1989. The "operating surplus plus primary income receipts" was 119 trillion yen in 2022, compared with 89 trillion yen in 1989, a stunning increase. Primary income receipts in 2007 were 23 trillion yen, not much different from 1989, and "operating surplus plus primary income receipts" in 2007 were 119 trillion yen, the same as in 2022. In 2007, however, Japanese companies were heavily dependent on profits from the long-stagnant domestic market.
Since the late 2000s, Japanese companies have increasingly shifted their production bases overseas, and now profits from overseas markets, which continue to grow at a high rate, are increasingly influencing stock prices. - Akihiro Nomura, Editorial Columnist, Toyo Keizai
The balance of foreign direct investment in stocks has increased to 274 trillion yen in 2022, compared with 21 trillion yen in 1989 and 62 trillion yen in 2007. The high dependence of the Japanese economy on overseas demand is reflected in exports. From 1989 to 2022, exports of goods and services increased by a factor of 2.8, of which exports of goods increased by a factor of 2.6. Since the late 2010s, the expansion of inbound tourism (foreign tourists visiting Japan) has boosted the growth of services exports, but in the 33 years since 1989, exports of goods have also increased significantly, despite the noted decline in industrial competitiveness. Incidentally, there was no significant difference in the average dollar-yen exchange rate between 1989 and 2023.
At best, the Japanese economy is "reaching new heights through successful globalization," and at worst, "reaching new heights but hollowing out the domestic economy." - Akihiro Nomura, Editorial Columnist, Toyo Keizai
Although the trade balance has deteriorated recently due to the high price of imported fossil fuels, and net exports and imports are unlikely to contribute to the operating surplus, there is no change in the increasing dependence on foreign countries for demand from Japan-made capital goods and final goods. On the other hand, domestic demand (private + public demand) grew only 1.4 times as fast as nominal GDP in the same period. The stagnation of domestic demand due to sluggish wage growth and uncertainty about employment and the future is directly related to the low growth of the Japanese economy. However, from the perspective of stock prices, Japanese companies have avoided the effects of such stagnation in domestic demand by expanding overseas and increasing exports, thereby increasing consolidated profits.
National Finances: New government bond issuance in fiscal year 1989 was 6.6 trillion yen, but this has ballooned to 62 trillion yen in fiscal year 2022 due to a supplementary budget for coronavirus-related measures.
Government debt outstanding rose sharply to offset the slump in domestic investment by the private sector. - Akihiro Nomura, Editorial Columnist, Toyo Keizai
During this period, the government debt dependency ratio in the general account increased from 10.1% to 44.9%, and the amount of government bonds outstanding increased sharply from 160 trillion yen to 1,042 trillion yen. On the other hand, the corporate sector, which is supposed to be an overinvested sector, has been saving excessively since the 2000s, and the cash and deposits of private nonfinancial corporations grew to an unprecedented 339 trillion yen in fiscal 2022. This is due to weak domestic private demand and private demand for funds, and it is the government that has increased the budget deficit and the issuance of new government bonds to make up for the shortfall.
Commentary: I was a foreign exchange student from the U.S. in the late 1980s when Japan's economy was the envy of the world and excess spending was in vogue. It was just before the era of the famous otachidai (お立ち台) balcony on which which girls danced at the legendary Juliana's Tokyo (ジュリアナ東京). While the bubble soon burst almost simultaneously with my entry into the working world (great timing!), I was able to weather the storm by switching to the healthcare industry - an industry perfectly positioned to ride the ever-building "silver tsunami" - and by joining an American medical device manufacturer. I completed three multi-year "tours of duty" that took me back and forth between the U.S. and Tokyo for more than 3 decades, finally settling down for good in relatively low-cost Kyushu. During that time, the exchange rate between the Japanese yen and the U.S. dollar ranged from a high of 80 to the current level of 150. It has been a wild ride, but I am glad to have maintained my lifelong interest in Japan for many reasons besides dollars and cents (or yen).
That said, I am sorry to rain on the parade of the recent Japanese stock market highs, but largely due to long-term demographic trends and the enormous amount of government debt, I tend to be quite pessimistic about the long-term prospects of the Japanese economy. However, due to the country’s huge cash reserves and the extent to which the Japanese economy is intertwined with the U.S., Japan will be "just fine" for decades to come. As a result, I feel comfortable calling Japan my home indefinitely into the future.
What do you think? Given all these economic data points, what are the long-term prospects for Japan?
Link to Japanese Source: https://toyokeizai.net/articles/-/736429
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Japan will be fine and prosper over the next 15 years.
But thinking that being tied to the US will in anyway help Japan, really shows your ignorance on true economics. I’d suggest studying up on Austrian economics. If anything, being tied to the US anytime in the next 5 years will be a burden on Japan.
Unfortunately, I don't think that the new high on the Nikkei-225 is particularly meaningful or good news. The rise in the index has more to do with the deteriorating purchasing power/debasement of the JPY as a result of the huge and growing national debt. The debt-to-GDP ratio is now 264% and the budget deficit is 4% of GDP. The stock market is also a fake market. It is so manipulated. Compared with land, the stock market is relatively easy to massage and manipulate.
The same is true of US markets. Ties to the US will not help Japan. The US is in a debt trap and close to the mother of all financial and monetary crises. Currency collapse is inevitable. The only question is whether the dollar or the yen will collapse first.
The official figures on everything are fake. In the six years that I have been living in Japan, the cost of my groceries and eating at our local sushi restaurant, for example, have more than doubled.
https://alasdairmacleod.substack.com/p/keynesian-credit-creation-meets-its