The Japanese stock market has been one of the world"s best performers this year. From the beginning of the year to the close of June 30, the cumulative increase of the Nikkei 225 index reached 29.06%.

The International Monetary Fund said in April that Japan"s economic growth would accelerate to 1.3 percent this year, well above the 0.8 percent growth in the eurozone and the 0.3 percent contraction in the UK.

The problems of low inflation, low growth and stagnant wages that have plagued Japan for a long time since the collapse of the bubble economy appear to be easing. Whether the growth of the Japanese stock market and the real economy can be sustained has become a topic of concern for global investors.

【资料图】

Chen Yan, executive director of the Japanese Enterprise (China) Research Institute, told NBD that the recent rise of the Japanese stock market is closely related to the driving effect of Buffett"s share purchase and the depreciation of the yen, but the problems that have plagued the Japanese economy for a long time, such as the stagnation of technological innovation and the decline of entrepreneurship, still exist. The Nikkei may return to its bubble peak, but it is also likely to be short-lived.

The latest data also suggest that Japan"s stock market rally is running out of steam. The Nikkei 225 index failed to gain ground after closing at a 33-year high of 33,706.08 on June 16. Foreign investors net sold about Y543.8bn of Japanese stocks in the week to June 24, according to the latest data from Japan"s finance ministry, ending a 12-week streak of net inflows.

Chen Yan graduated from the prestigious Keio University in Japan and has taught Japanese economy at several Japanese universities. After returning to China in 2003, I have been engaged in interviews and research on Japanese enterprises for a long time, and have a profound understanding of the Japanese economy. He believes that Japan"s economic woes have a lot to do with Abenomics, and that ultra-loose monetary policy has not brought about a real economy, but has caused continuous loss. Kazuo Ueda, the new governor of the Bank of Japan, although he is still ostensibly sticking to his predecessor"s policy, there is a high probability that he will change course in the future.

Three factors contributed to the rally

NBD: Since the start of the year, the Japanese stock market has been on the rise, especially since April, outperforming major global stock markets such as Europe and the United States. What do you think is the reason behind this?

Chen Yan: First of all, we can"t just look at Japan and we can"t just look at these months this year to evaluate the rise of the Japanese stock market. Between 1989 and 2023, the Dow Jones Index in the United States has increased more than 10 times from less than 3,000 points to more than 30,000 points now.

At its peak in 1989, the Japanese stock market was close to 40,000 points, and today it is about 33,000 points, roughly recovering to more than 80% of its value 34 years ago. So if you look at the long term, the Japanese stock market has not reached its previous peak, which shows that the Japanese stock market has been in a state of loss for 34 years.

NBD: So what explains this rise in terms of recent factors?

Chen Yan: I think there are several points: the first point is that Warren Buffett has been increasing his holdings in Japanese conglomerates.

Second, Japanese companies such as Mitsubishi bought back about 300 billion yen of shares, and Toyota bought back 150 billion yen of shares. This large-scale buyback has also increased the scarcity of shares to a certain extent, increasing the room for stock price improvement.

The third is the depreciation of the yen.

NBD: Buffett has said that the stock prices of the five major companies he invests in are very attractive. On the other hand, the Tokyo Stock Exchange also ordered listed companies to carry out reforms in April to increase the price-to-book ratio. Why do you think the stock prices of Japanese companies have been hovering at a low level for several years?

Chen Yan: A large number of listed companies in Japan have a price-to-book ratio of less than 1 times, which means they have a lot of assets but a very low stock price. You have to be at least one times book value to get people to buy these stocks.

Why does the company clearly have a share of assets, but the stock market gives him a few points of evaluation? Or because the stock market looks into the future. I think the good and bad of enterprises are more related to equipment technology updates. If a company invests in a new piece of equipment or a new product that increases labor productivity, stocks are worth buying.

In recent decades, Japanese companies have focused on financial instruments rather than technological innovation. For example, Japan has very good electric vehicle technology, but Japanese companies did not produce electric vehicles before. The inventors and patents of lithium-ion batteries are in Japan, but there are no battery factories.

Japan used to make cell phones, and they don"t make cell phones anymore. Today, most of Japan still uses 3G, some parts of Tokyo use 4G, but there is no 5G. If there is no communication technology, there are no Internet platforms such as Google and Amazon in Japan, and if you want to use them, you will also use the United States.

The lack of technological innovation in Japanese companies for more than a decade has led to a low evaluation of Japanese companies in the stock market.

The disappearance of entrepreneurship

NBD: As you say, Japanese companies have a lot of assets, but why are they not investing them in technology and product innovation?

Chen Yan: This is a phenomenon called "liquidity trap" in economics. We saw that there was a lot of cash out there, but the money was moving around inside the banks, and there was a liquidity trap, and the money couldn"t flow out.

Why does this happen? This goes back to the bubble economy. At the peak of the bubble economy, Japanese enterprises borrowed a lot of money to buy stocks and real estate, but after the bubble burst, the Nikkei Index fell from nearly 40,000 points to a low of 6,000 points, the real estate fell from the highest price to only 1/6 of the original price, enterprises and individuals bear a lot of debt, so the first thing they do after they have money is to return to the government and banks.

Moreover, we will see some very strange phenomena, such as Japanese companies during the three-year epidemic did not lay off workers, because Japanese companies have a lot of cash in the bank, which can be used to pay workers. This is a very good phenomenon, can maintain social stability, but from another level, there are no results, no increase in exports, no new products appear.

NBD: So in the post-bubble economic environment for many years, the management of Japanese companies also formed a relatively conservative mentality and lack of entrepreneurship?

Chen Yan: Today, the middle and senior management of Japanese enterprises are some bureaucrats, and they will never say that we risk investing in a semiconductor company or a battery factory, and it is impossible to invest in electric vehicles, which is several trillion yen, because the president or director level of Japanese enterprises generally only work for two years, at most four years. So what he wants is to make sure that none of the judgments he makes during his tenure are too big to sustain a huge investment project.

As a result, Japanese companies are no longer innovative and entrepreneurial. If you think back, is there a Japanese entrepreneur in recent years that you think is particularly great? Who is this era of Matsushita Konosuke or Inamori Kazuo, will be discussed by young people? Even Akio Toyoda is now a professional manager, not a real entrepreneur.

Give Ukita some time, and he"ll change

NBD: You mentioned structural problems with Japanese companies and the economy, but the revised GDP growth rate in the first quarter was 2.7%, and the increase in business spending was the main reason for the upward revision. Japan"s recent inflation is also at the level of 3% to 4%, and wages have finally begun to increase, and it seems to have the momentum to break through the dilemma of low inflation and low growth.

Chen Yan: The 2% inflation target was proposed by Abenomics in 2012, and it has not been achieved during Abe"s tenure as prime minister, but after the Kishida Cabinet, inflation over 3% suddenly appeared, mainly because of the rise in energy and food prices after the conflict between Russia and Ukraine. Japan imported all its energy from abroad, and it did not produce wheat, so inflation quickly rose.

Due to the inflation problem, the Kishida government has paid special attention to raising wages for workers this year, but the increase has not exceeded inflation, and the real purchasing power of the Japanese people today is lower than that of last year. In this situation, people are more afraid to spend money, because the salary increase is limited, but the price has risen a lot, I am less likely to buy luxury goods, less likely to travel.

If a country"s consumption does not improve, its economic growth will certainly not rise, and today Japan is still in this whirlpool and continues to fall, and this problem is still not solved.

NBD: So, given the current momentum, is it possible that the Japanese stock market will break through the peak of the bubble economy (about 39,000 points) and reach 40,000 points? It would be a very symbolic breakthrough.

Chen Yan: I think it"s possible. Now only ten percent of the gap, with the current inflation rate and the continued depreciation of the yen, I think it is possible to break through the 40,000 point.

My forecast is to look at the spring of 2024, when the 2023 earnings report comes out, we will first look at what the exchange rate is like, if it is still falling, it is equivalent to you earn more money abroad; Second, equipment investment, equipment investment, indicating that productivity has gone up; Plus, if you give your employees a raise, you"re doing a good job. If you have all these factors, the stock will go up.

But if Japanese companies are not investing in equipment, workers" wages are limited, exports are weak and the exchange rate is even lower, then foreign investment may be ready to flee, because much of the foreign investment into Japanese stocks is short-term investment. At that point, American capital might press down on Japan, bidding up the yen (and leaving the market at a high Japanese stock price) so that they can convert more dollars. Then the 40,000 level may appear briefly, but then quickly recover, which is my bold prediction for March-April 2024.

NBD: You always emphasize the exchange rate factor in your analysis. The new BOJ governor, Kazuo Ueda, is still inheriting the ultra-loose monetary policy of his predecessor Haruhiko Kuroda. Do you think he will change the direction of policy in the future?

Chen Yan: I think Ueda and Kuroda are completely different. Ueda is a scholar. The result of Kuroda"s ultra-quantitative easing has brought long-term loss to Japan, and Japan has not been benefited, and it must be reformed in finance.

From what I have observed about the economy and life in Japan over the years, it is intolerable that the Japanese people are constantly getting poorer. This is the end result of Abe"s policy, the indiscriminate printing of money has not led to real economic growth, and companies have money, but there is no follow-on force for development. This is one of the results of the financial policy, which must be changed, and I believe Ueda will make this change.

But the head of the country"s central bank cannot just change it. There will be a gradual process. So despite Ueda"s rhetoric, I don"t believe at all that he will continue with his predecessor"s quantitative easing policies.