Investor Essentials Daily

Japan’s economy is showing signs of life

May 6, 2024

Japan’s GDP grew significantly from $91 billion in 1965 to $1.1 trillion by 1980, with its economy focusing on innovation, efficient manufacturing, and exports, particularly in consumer electronics and automobiles. 

Companies like Panasonic (TSE:6752) and Toyota (TM) became global leaders. However, the economic bubble burst in 1989, leading to a severe stock market crash and a prolonged economic stagnation, characterized by the creation of “zombie” companies, slow wage growth, and minimal inflation. 

Recently, there has been a shift, with inflation and wages beginning to rise, prompting the end of negative interest rates and a move toward more normal monetary policies. 

This economic revival is marked by a significant stock market rally, suggesting a potential resurgence of Japan’s economy after three decades of stagnation.

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Japan’s GDP grew from $91 billion in 1965 to $1.1 trillion by 1980…

The nation focused on innovation, efficient manufacturing, and exports.

It became the global hub for industries like consumer electronics and affordable, durable cars. And the world couldn’t get enough of its products. Companies like Panasonic (TSE:6752) and Toyota Motor (TM) grew to be among the biggest in the world in 1989.

It was a great growth story until the Japanese stock market peaked in 1989 and the economic bubble burst. Then, everything took a turn…

The Nikkei 225 Index crashed nearly 60% in a few years. And it barely grew for decades.

Industries like real estate and banking took a beating. Housing prices tanked around the same time the stock market did, and with that, the rest of the economy started struggling.

Over the next decade, a lot of companies couldn’t pay their debts, which ended up hurting banks. However, the nation refused to let companies die. Banks didn’t want to force lenders into bankruptcy… So they papered over the losses and kept them barely alive, creating a fleet of “zombie” companies.

This sucked all the innovation and growth out of Japan’s economy. It ended up in stasis.

Wage growth slowed, and the government practically halted inflation through rate cuts. Until recently, Japan hadn’t raised interest rates since 2007. And since 2016, the country’s interest rate has actually been negative.

Wage growth has been practically nonexistent. And inflation has hovered near zero – it even had a few years of deflation.

Recently, though, that has all been changing…

Over the past two years, inflation picked back up in earnest. And it started to inject a bit of life into the economy…

Japan’s inflation was 2.5% in 2022, and it climbed to just over 3% in 2023… its highest since 1991. For most of the past 30 years, inflation (or deflation) was within 1 percentage point of zero.

This pushed wages to pick up this year, with the nation’s biggest companies agreeing to a 5.3% pay hike – once again the largest increase since 1991.

In turn, the Bank of Japan recently decided to end its negative-interest-rate policy. At the end of March, the central bank’s policy makers voted to raise the short-term interest rate range to 0% to 0.1%.

It was the country’s first rate hike in 17 years – and it’s a great show of confidence from policymakers.

It’s a sign that they feel the economy is finally growing stronger… and that the country may be ready for a more “normal” monetary policy that allows for a small amount of inflation, positive interest rates, and regular wage growth.

After a 30-year hiatus, Japan finally looks like it’s worth investing in again…

The Nikkei 225 even reached a new all-time high this past February.

If the nation embraces that a little bit of inflation could actually be a good thing for the economy, this may be the beginning of a comeback for Japan’s stock market.

Japan is still home to powerhouses in the auto, tech, and manufacturing industries – many of which didn’t have to do much innovating over the past several years because of how stagnant the economy was.

That’s about to change. The wheels finally seem to be spinning again… and Japan looks ready to make up for 30 years of treading water.

We expect the Nikkei 225 to show a lot more life for years to come.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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