Share Prices & Company Research


24 August 2023

Under the Radar: Japan’s Recent Rally

This article was taken from the June 2023 issue of Market Insight. To subscribe to our investment publications, please visit

The world in 1989 was a very different place. The World Wide Web was invented, The Soviet Union was crumbling, and the UK was emerging from a decade of strikes, high inflation, big hair, and bigger shoulder pads. Further away in the east, however, the Japanese economic bubble was reaching its apex. The boom years of the 1980s saw real estate valuations reach levels that could without exaggeration be described as astonishing.
At its peak, Tokyo real estate could be bought for US$139,000 per square foot – 350 times that of the equivalent space in Manhattan. It was speculated that the real estate value of land occupied by the Imperial Palace alone was worth more than the entirety of the state of California. The benchmark Topix index reached an all-time high in December 1989. Flush with cash and confidence, Japanese companies began buying up prestigious assets; the Rockefeller Centre in New York was bought by Mitsubishi Group and Sony claimed Hollywood studio Columbia Pictures. Japan’s rise seemed so unstoppable, surely it was only a matter of time before it overtook the US to become the world’s dominant economy, as proposed by academics such as Ezra Vogel in his book ‘Japan as Number One.’

In the end, of course, it never happened. The bubble burst, as they are prone to do. The consequences would be profound and overshadow the Japanese economy and society for decades. The Japanese yen, the stock market, wages, and inflation stagnated. A generation on, investors, both inside Japan and outside, had been burned. Historically, the average US bear market lasts around 14 months. Japan has waited more than 30 years for the Topix index to touch its previous record high in May of this year. Rallies in the interim have been limited, causing stocks to trade within narrow ranges. Recently, however, a shift in trends both locally and globally has reignited interest in Japanese equities and investors are holding their nerve and starting to buy this long-neglected sector. But why Japanese equities and why now, after all this time?

There are several interesting factors in the equation. One of them is now very familiar to us in the UK – inflation. Japan has long contended with deflation – prices stay flat or even fall, and if your living costs do not rise, why take any risk with your savings? As such, the nation’s households have accumulated US$7tn in low-yielding bank deposits. But inflation has finally returned, with Japan’s core measure of consumer inflation rising more than 4% in April. A new governor at the Bank of Japan and rising prices have led to speculation that the days of ultra-loose monetary policy may be drawing to a close. If so, this would benefit equities. Praveen Kumar, manager of Baillie Gifford’s Shin Nippon Trust, said in a video update “We are seeing record levels of wage growth above core inflation amidst a worsening labour shortage situation. This should provide a structural boost to domestic consumption.”

Investors have also credited Hiromi Yamaji, the new head of Japan Exchange Group, which controls the Tokyo Stock Exchange, for his push to drive reforms at a corporate level: improving capital efficiency, raising corporate value, and rewarding shareholders. So serious about this is the Tokyo exchange that companies with price-to-book ratios consistently below one will be required to outline specific plans to address these issues. These are some years away from coming into force but companies are starting to fall in line, which is catching attention from overseas investors. Lured by the prospect of more efficiently deployed capital, in May a group of over five hundred institutional investors with an estimated US$20tn of assets under management met for the first forum since 2019, with the key focus of the event being Japan’s post-pandemic recovery.

Hedge fund Citadel is planning to re-open its Tokyo office after an almost 15-year absence. After building stakes in Japan’s five biggest trading houses over three years, Berkshire Hathaway founder Warren Buffett made his first visit since 2011. In an interview with financial newspaper Nikkei, Buffett said that further investment was “always a matter of consideration.” There are also geopolitical factors in play. As the rally in China’s market fizzles out and the US and China continue to decouple, Japan senses an opportunity to reposition itself as an Asia-Pacific leader. Economic performance notwithstanding, Japan is nothing if not stable - a reliable ally and trading partner to the West. Following a meeting with the executives of chip manufacturers, Prime Minister Fumio Kishida said “since the inauguration of my administration, I have strived to achieve the revival of the Japanese semiconductor industry and expand investments in Japan. In this regard, I am very pleased about your positive attitude expressed today toward making investments in Japan.”

If you have a wary sense of déjà vu at this point, it is not without good reason. We have been down this road before - 2013-2015 saw overseas investors inject US$250bn into Japanese markets on the promise of market reforms. In subsequent years, almost that exact same amount was withdrawn after the reforms never fully materialised. If the rally is to become something more tangible and long-term, the driving forces behind it will have to demonstrate that they represent real change. It will never be 1989 again, but there could be new glory days ahead for Japanese markets. Investors in the Land of the Rising Sun will have to hope this is not another false dawn.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Under the Radar: Japan’s Recent Rally
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