With all the recent noise about the Chinese economy, spare a thought for the country it’s replaced as the world’s second-largest economy: Japan.
The Japanese stock market has been one of the best-performing markets in recent years partly on the back of “Abenomics”, economic policies introduced at the 2012 general elections by Prime Minister Shinzo Abe. These policies were aimed at stimulating the economy and initiating structural reforms. But Japan watchers with a long enough memory may question whether there will be enough tough love to shake up Japan and put the country back on a path to justify further stock market outperformance. After all, there have been many false dawns before.
Long before China started showing incredible growth numbers, Japan was the poster child for how a country can pick itself up from the ashes of war and, within a few short years, amaze the world with the scale of its economic development. It was at the forefront of innovation, its technology companies were world leaders and it offered productivity models that were being adopted around the globe. In the 80s we were all clamoring after Sony Walkmans, Nintendo video games and Toshiba video players. ‘Made in Japan’ was synonymous with quality, reliability and innovation.
And with that narrative as a backdrop, companies expanded aggressively as they flooded the world with their gadgets. The astonishing pace of economic growth led to more and more capital being pumped into Japan, much of which was speculative and based on easy and irresponsible credit from banks.
This gave us what was termed as the “Lost Decade”, the period that saw the Japanese economy collapse on the back of the bursting of its asset price bubble and stock market. As it turned out this “decade” effectively lasted from 1991 to 2010, as the expectations for a recovery in the economy in the new millennium failed to materialize.
Unfortunately, the cozy relationship between corporations, lenders and governments that enabled growth to thrive in the post-war years is now the cause of trouble for a country unable and unwilling to adapt to global economic realities. Protectionism and corporate collusion have gradually eaten away at Japan’s ability to be productive.
Yes, it provided a safety net for the population, but at the same time “cradle-to-the-grave” employment, anti-takeover legislation and a lack of willingness to restructure inefficient businesses have all played their part in creating the Japan we have today – a country with deep structural flaws and not equipped to compete with the likes of China.
It’s a crisis of governance, both in how companies are run and how the nation is. And unfortunately it’s ingrained. For example, only one-third of Tokyo-listed companies have any independent directors – in comparison, by law half of the board has to be from outside in the US. As a result, there is less accountability for management actions and little in the way of shareholder activism or hostile takeovers.
The longer-term story for Japan is still a difficult one to work out. There have been some cosmetic initiatives implemented by the government. But it’s still a country that fosters inefficient industries, has an ageing population to support, has a relatively low female participation rate in the workforce and isn’t a country that encourages immigration to replace the worker shortfall.
It’s still in denial that it needs to change. Even now at a time when South Korean, Taiwanese and Chinese manufacturers are building TVs that are as technologically advanced but far cheaper to make, Sony and Panasonic still won’t retreat from a business that is causing them to lose millions of dollars.
Until Japan makes the tough decisions and implements the systemic changes that need to take place, we unfortunately will be left with more of the same – plenty of promise but reality setting in after every bounce on the Nikkei.
Stock market valuations partly discount the risks but many investors have bought on the basis the stock market was “cheap” only to have to wait years to see a return on their money. As an investment destination, Japan will offer short-term bet opportunities. There will always be “green shoots” of recovery that will entice foreign investors in. But until we see a seismic cultural shift, it’s probably not the place to put your hard earned cash into over the long term.