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Tuesday, November 10, 2020
How Japan's Stock Market Emerged from the "Lost Thirty Years"
ANBOUND

Capital markets around the world have recovered from the backdrop of the U.S. election result and encouraging news of COVID-19 vaccines. Among the capital markets, the continued rise in the Japanese stock market has special significance. On November 10, the Nikkei 225 index closed at 24,905.59, up 0.26%, and had risen to 25,279.94, its highest level in nearly 30 years. Over the same period, the Nikkei 225 has outperformed the major indices around the world. Some analysts believe that the recovery of the Japanese stock market to its nearly 30-year high means that the Japanese capital market will take the lead in getting rid of the stagnation of the "lost thirty years", thereby ushering the Japanese economy into a new stage.

The Japanese stock market went through a prolonged growth phase in the 1970s and 1980s, reaching an all-time high of 38,957.44 at the end of 1989 and a low of 6,994.9 in October 2008, a decline of more than 80%. During this period, the Japanese stock market experienced the U.S.–Japan trade frictions, the asset bubble burst, the Asian financial crisis, the internet bubble burst, and the 2008 global financial crisis. It can be said that these cyclical and crises led to the long-term downturn of the Japanese stock market.

Since Shinzo Abe became Prime Minister and promoted "Abenomics", the Japanese stock market have gradually started to emerge from the recession cycle. This period was driven by the policies of the Japanese government, and it was also closely related to the changes in the economic structure of Japan and the improvement of the financial market environment. After 2018, the Japanese stock market became one of the few safe-haven markets in the face of the intensified trade conflict between the United States and China and the anti-globalization trend in international trade. Warren Buffett's recent announcement that he has invested more than USD 6 billion in Japan's major trading houses over the past 12 months actually reflects overseas recognition of Japanese listed companies. Thus, Japanese recovery and stability have been recognized and accepted by investors worldwide. How did Japan emerge from the crisis? In the context of the Covid-19 and the dramatic changes in the international situation, it is of special significance to review the course of the "lost thirty years" of the Japanese stock market.

The gradual recovery of Japan's capital market and its economy out of woods cannot be separated from "Abenomics". While many are more concerned about Japan's insistence on fiscal and monetary stimulus in recent years, they take a different view. However, it has to be admitted that although Japan's economic growth is still at a relatively low level, its long-term positive growth cannot be achieved without the policy support of the Japanese government. Abenomics has boosted the Nikkei 225 by 127.95% since Abe was appointed prime minister. The Bank of Japan's purchase of ETFs in the market since 2010 has helped prop up the Japanese stock market. Data show that as of September 20, 2019, the Bank of Japan's ETF holdings reached JPY 27.4 trillion, accounting for more than 65% of the domestic ETF holdings. If take into account the Japanese government's increased bond holdings, the Japanese government's direct investment is indeed the basis of the stock market to get out of the woods.

The flexible fiscal policy, bold easing policy, and economic growth strategy aimed at attracting private investment, known as "Abe's three arrows", are not only reflected in the expansion of fiscal deficit, quantitative easing, negative interest rate policy, and other short-term macro-control policies. The reform of the financial system and structural reform policies to encourage private investment have also shown their important role. Back in the 1990s, the bursting of the bubble in the Japanese capital market was not only due to external factors such as the trade friction between Japan and the United States, but also due to internal factors such as strong government intervention, monopolistic financial market, and abnormal investor structure. The other "two arrows" of Abenomics is obviously pertinent to this. After a long period of reform, Japan's stock market has been fully open, and the financial institutions have greatly improved their risk profile. It can be deemed that during the "lost thirty years", risks in Japan's financial system were gradually eliminated, and problems such as "cross-shareholding" and oligopoly were ameliorated, which greatly enhanced the stability of the financial market.

In addition, some analysis mentioned that the changes in the Japanese stock market are also the result of changes in Japan's industrial structure. In the 1980s, the Japanese government proposed to build a creative "Science and Technology nation" and to carry out a comprehensive adjustment of the industrial structure. Under the guidance of this policy, high-tech industries and service industries have developed rapidly and now become the pillar industries in Japan, which has promoted the relatively high ROE level of these industries and brought new space to the capital market.

In terms of the long-term changes in the stock market, the sectors where Japanese stocks fell sharply included finance, metals, utilities, machinery, and construction. Relatively strong performers are automobile, pharmaceutical, consumer goods, some electronics, and service companies. The sectors with the highest long-term yields on the Japanese stock market are consumer goods and technology, according to research by Tianfeng Securities. From 1973 to 2019, the three industries with the highest annualized rates of return for Japan were health care (+5.8%), food and beverage (+4.7%), and science and technology (+4.5%). The three sectors with the lowest annualized returns are basic resources (+1.0%), financial services (+1.6%), and oil and gas (+1.7%). These structural changes in the stock market reflect shifts in Japan's industrial and economic structure.

Of course, there are still many difficulties and obstacles in the future development of Japan's economy and its capital market. In addition to the threat of the COVID-19 pandemic, it is the reliance on long-term government support, huge debt and fiscal deficits, and the aging population that are all impeding Japan's economic growth and its stock market's another round of boom. Japan also needs to face drastic changes in geopolitics and economic and financial environment. These are all new challenges for Japan, which has just emerged from its "lost thirty years".

However, the process that the Japanese stock market has gone through is actually of great significance to China. Issues related to preventing the financial oligopoly from reversing, preventing financial bubbles caused by capital shortage, breaking the monopoly of state-owned enterprises, promoting private investment, encouraging scientific and technological innovation, realizing industrial upgrading, etc., are actually experienced by the Japanese economy and its stock market, and the lessons and process are valuable for China. If Japan took three decennia to get out of its development quagmire, then China's capital market development and economic restructuring likewise require long-term preparation.

Final analysis conclusion:

After a long slump, Japan's stock market is emerging from the "lost thirty years". Government stimulus, structural reforms, and a technology-led industrial restructuring have been cited as key factors of pulling Japan's economy and stock market out of its long-term woes. In fact, these experiences and lessons can also serve as reference and warning for China that is facing similar problems.

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