A Deep Dive into Japan's Economy

Yung Hsueh Lee, ‘26

Japan, one of the most powerful countries in the world in terms of military power, societal stability, and economic growth, is recently being surpassed by Germany to be the fourth-largest economy, while this is within the expectation of the general public due to its recent economic performance, it is interesting to take a deeper insight into Japan’s economy and break the misconceptions. While many say the reason why Japan fell off is due to its inability to keep the economy running, I disagree with that statement. With GDP (Gross Domestic Product) calculated in US dollars, Japan is at an absolute disadvantage since the Japanese yen has weakened over the course of the past 12 months; therefore it is not an accurate metric to measure the economy's performance. On the other hand, Japan’s GDP (in yen) has been increasing in a positive direction, indicating that the society does see a significant increase in consumer behavior that can positively accelerate the economy.

In addition, it is also interesting to note that the Japanese stock market, the Nikki index, just broke the record setting the highest index in Japan’s stock market history, with the index closing above 40,000. This is a significant indication that Japan is shifting from its inflationary economy after years of deflation as well as its corporate governance reforms are taking root.

Another interesting factor is the sign of wage inflation in Japan. During this year’s shunto spring negotiations, there has been a raft of news reports on substantial wage hikes at large companies, leading to boosting prices as well. On the other hand, we can also take a look at the reform. Through the government’s request for various measures, the Tokyo Stock Exchange has incentivized listed companies to boost valuations. “We see signs that a healthy market environment is being created, in which companies are seen taking action driven by investors' interests/concerns and dialogues,” Tatebe and Kirk write. “We believe that the Japanese stock market is in the early stages of a long-running transformation.”

Lastly, to predict the future of the Japanese Stock Market, we can look at the capacity of domestic/foreign investors to estimate a ballpark. With governance reforms spurring greater buyback activity, Japanese companies are expected to be major buyers of equities in 2024. In addition, local retail investors have been net buyers of Japanese equities since late January as the market climbs, which can be the turning point in their stance on the equity market, especially during this inflationary economy. Not just the domestic buyers, the foreign buyers seem to be on the same page according to Tatebe and Krik, “We believe foreign investors still have significant capacity to invest in Japan equities.”