[Opinion] A Different Perspective on the Japanese Economy

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The Japanese stock market is heating up. With the Tokyo Stock Exchange breaking historical highs for the first time in 34 years, investor interest is intense. It is natural to think that we need to take another look at Japan. However, the main reason for the sharp rise in the Japanese stock market is far from an improvement in the real economy. While government stock market stimulus measures and shareholder-friendly policies have some influence, fundamentally, Japan's stock price increase is a phenomenon that has appeared in conjunction with ultra-low interest rates, a weak yen, and geopolitical choices.

Japan's quantitative easing, which induced the current weak yen, began in 2013 after Prime Minister Shinzo Abe took office. The value of the yen per dollar fell from 86 yen at the end of 2012 to 144 yen in 2024. Calculating from then, stock prices have more than tripled. Of course, export companies' profits have increased. The net profits of listed Japanese companies are expected to hit record highs for three consecutive years.

But that's about it. Amid long-term stagnation, Japan has increased its overseas production bases, with more than 25,000 companies currently operating abroad, producing more than a quarter of Japan's total manufacturing output overseas. Thanks to overseas subsidiaries, consolidated earnings have greatly increased, but profits converted into yen are significantly inflated. If the sharp depreciation of the yen led to record corporate profit generation, the intensified friction between the U.S. and China also provides the background for Japan being chosen as an alternative to investment in China. Investment funds leaving China are flowing into Japan. Foreign investors are the main drivers of the rally in the Japanese stock market. About 70% of stock trading volume is accounted for by foreign investors. Japanese individual investors make up less than 20%.

Japan is a case where the stock market and the real economy are separated. The economy is still not recovering. Japan's economy recorded growth rates of -3.3% in Q3 and -0.4% in Q4 last year. The living standards of the Japanese people are rather rapidly declining. The real wages of Japanese workers decreased by 2.5% compared to the previous year. This is not just a one-year phenomenon. Over the past 30 years, it is estimated that the real wages of Japanese workers have decreased by more than 10%. Despite differences in per capita national income, the average annual salary of Japanese workers in dollar terms is lower than that of South Korea. While this may be advantageous in terms of competitiveness, low national income cannot be the goal of economic growth. Moreover, low income leads to a vicious cycle of consumption contraction.

Looking closely, the recovery of the Japanese stock market is merely a return to the stock prices of 34 years ago. The global economy has tripled in size during that time. Over the past 34 years, the U.S. S&P index has increased 14-fold, and even our KOSPI index has tripled. In terms of per capita GDP, South Korea has increased fivefold and the U.S. threefold over 34 years. However, Japan has increased by only 36%. Japan's GDP, which accounted for 15% of the global economy, has now shrunk to about 5%. In 1989, 32 Japanese companies were ranked within the top 50 in the world by market capitalization. Now, only Toyota stands alone.

It is true that the Japanese economy is changing somewhat. It needs to be watched. But structural reform is still far away. Japan's potential growth rate, which was in the 4% range until the 1980s, fell to 0.25% in 2023. This is due to a declining working population and a slowdown in productivity growth. The downward trend in potential growth rate is difficult to reverse. Ultimately, innovation is the key everywhere and always.

Thanks to the weak yen, many Japanese companies easily gain foreign exchange profits, but sustainable economic growth is not possible with monetary policy and geopolitical luck alone. Since 2013, Japan's average annual economic growth rate has been only 0.7%. How long can a stock market boom without economic growth last? What is needed, as always, is restructuring and innovation. The same applies to us.

Sangcheol Kim, Economic Commentator

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