Economic Indicators
Japan
Household, corporate officer buy-in could drive returns
Shintoku Nishiwaki
May 3, 2024
The story of Japan overcoming its Lost Decades is deep and fascinating. In addition to this analysis by Capital Group equity analyst Shintoku Nishiwaki, you can read our main analysis of the Japanese economy by economist Anne Vandenabeele; how recent economic reforms could lend resilience to this upswing, by equity analyst Sean Tian; and a look at the positives of inflation and the “ramen index” by equity portfolio manager Kohei Higashi.
The changes in Japan’s economy aren’t just about revenue and profit — they’re also about behavior.
One perfect example: While 51% of U.S. households have some sort of exposure to the stock market, only 15% of Japanese households do. That reflects the combined impact of stagnancy in the equity market and deflation in the broad economy, which created an environment where cash is king. Also, Japan’s NISA investment accounts, a kind of analog to the 401(k), had very low contribution limits. The result: most households didn’t see the need for anything more than a savings account.
However, in a normalized economy, mild inflation erodes the buying power of cash over time. If Japan’s incipient inflation becomes durable, investing in stocks could become much more attractive. Further helping matters, investing limits on NISAs were dramatically raised this year, making them far more useful. This could all add up to more demand, a potential boost for share values.
The shifting patterns extend beyond individual citizens. Corporations are rethinking some of their habits — often in ways that I and other Capital Group analysts have long championed.
For example, Japanese businesses have often cemented working relationships by buying each others’ stock. However, this can breed conflicts of interest and limit the independence of boards of directors. It also loads companies up with a lot of shares, sunken capital that can’t be used to expand an underlying business or be returned to shareholders. The inefficiency can compound, as stock tends to appreciate in value over time and will weigh more heavily on various measures such as return on invested capital.
As a result, many of Japan’s stock exchanges have sought to prod better behavior. One tack has been to publish lists of companies that have committed to improving their metrics, creating a sort of reverse name-and-shame. Companies, particularly well-known ones, that don’t appear on these lists are often perceived as being unwilling to work in the best interests of shareholders.
Not only does this peer pressure work on many businesses, it can provide analysts with insight — I’ve used such lists to discover companies that could be on the cusp of adopting modern governance rules, reallocating their resources and, hopefully, getting rewarded for it in the stock market.
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