There are few economic stories in the world as fascinating as that of Japan. In the 1980s it was the epitome of economic success, being the second largest economy in the world. In December 1989, the Japanese stock market peaked, with 45% of the world stock market capitalization. From there they followed him three decades of stagnation economic and deflation, which drastically reduced Japan’s participation in the markets. Today, with a stake of only 6%, a recovery is observed of the Japanese economy. Indeed, in 2023, Japan led the gains in global stock markets, and in 2024 it continued this positive momentum.
There is several key factors who contributed to this rebirth. The Japanese economy has undergone a radical change with the return of inflation after decades of deflation. The significant price increase in 2023 was reflected in the 8.3% growth in earnings per share of the MSCI Japan index. This trend has been driven by factors such as increase in global demand for manufactured products and improving the pricing power of many companies, especially those targeting the Japanese domestic market. This change has generated a change in expectations stimulate investments and company profitability.
On the other hand, global diversification was also an important factor. The Japanese market offers a number of opportunities that improve the diversification and correlation of portfolios. In fact, the Japanese market has outperformed the S&P 500 Index in terms of performance, with a 39.9% increase from October 2022compared to 31.4% for the S&P 500 Index over the same period.
Government policies have also been an important catalyst. Reforms in the NISA program, where Families can invest their savings in equity assets with tax exemption, are encouraging investors to shift their funds from cash to stocks, which could result in significant flows into Japanese stocks in the near future. The situation is expected to reverse greater internal savings in the stock market. Potential matters. Japanese families invest only 10% of their savings in stock market investments, compared to 43% of American families or 27% of European families.
Another key factor was the business transformation. Previously inefficient companies have been restructured, leading to increased profits and improved stock performance. This can be countered by looking at the evolution of companies’ ratios in the Japanese TOPIX, where from December 2012 to December 2023 companies’ PBV went from 1.06x to 1.3x, PER from 21.5x to 16.6x, and ROE from 4% to 8%.
The favorable outlook for the Japanese economy is not without challenges. The aging population and public debt are two crucial challenges. With more than 28% of its population currently falls into the over 65 categoryJapan has one of the oldest populations in the world, raising concerns about the impact on the workforce and social security system. This situation is exacerbated by public debt, which reached 255% of GDP in December 2023, representing 46% of global public debt. This high level of debt, combined with an aging population, poses challenges to fiscal sustainability and long-term economic growth in Japan.
However, in the long term, expectations are favorable, as Japan also leads the way in areas such as medical technology, industrial automation and the transition to a low-carbon economy. These sectors represent significant opportunities for future growth and innovation. Government measures regarding pension system reform, debt management and promoting economic activity could mitigate risks on the economic growth path.
Source: Clarin
