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Find Your Way Back - Japanese Stocks

Find Your Way Back - Japanese Stocks

March 18, 2024

“Find Your Way Back” was released as the first single from Jefferson Starship’s album, Modern Times. It was released in April 1981 and peaked at #29 on the Billboard Hot 100 that spring. As MTV launched in August of that year, the song was a staple in a relatively small catalog of music videos that played in nonstop rotation during its early days.

Source: IMDb

A YouTube clip of the original video is included below. 

Jefferson Starship - Find Your Way Back (Official Music Video)

During the latter part of the 1980s, newspapers and evening news stations were filled with stories of Japan’s imminent takeover of the United States. Japan was an economic superpower. At the time, they built better cars and had a considerable advantage in technology and consumer electronics. Japanese conglomerates were using their vast wealth to buy up United States assets, as seen in a few headlines below.

Source: Business Insider

This led to fears that the United States' position as the world’s largest and most important economic and military power was going to be passed by Japan. Then came 1989. The stock market and real estate bubbles that had simultaneously formed in the Japanese economy began to pop, as you can see in the charts below.

Source: FRED, Investing.com

The Nikkei 225 index peaked at 38,915.9 on December 29, 1989. It subsequently lost more than 75% of its value. Over the last three decades, various administrations and the Bank of Japan have tried different policies to fight the malaise and deflationary pressures present in the Japanese economy. They were also fighting against alarming demographic trends with an aging population more inclined to save than spend.

Nearly 35 years after its last peak, the Japanese stock market has finally “found its way back” to a new peak. The Bank of Japan, which has had a negative or zero interest rate policy for much of the last 20 years, still has not raised interest rates meaningfully. The government is also buying assets and has substantially more debt than other countries, including the United States. As of the end of 2023, Japan’s government debt was 255% of GDP, more than double that of the United States at 123%.

However, new corporate and investor mindsets are taking hold. This is encouraging corporations in Japan to focus on profitability and return on equity and to refrain from sitting on stockpiles of corporate cash that are not being deployed for more profitable purposes. This is leading to a resurgence of corporate profits, while Japanese stocks are also trading at lower valuations than stocks in the United States. Since the last time the Japanese stock market was at this level, corporate profits are approximately three times higher today, as you can see below.

Japanese investors are also encouraged to move money from cash at the bank into the stock market. The government created a Nippon Individual Savings Account, NISA, a tax-free stock investment program, which is being promoted to increase household investments in stocks

According to the Bank of Japan, approximately 13% of individual household liquid assets are in stocks, compared to over 40% in the United States and 21% in Europe. In Japan, cash at the bank makes up more than 52% of a household’s financial assets, compared to 12 1/2% in the United States and 35 1/2% in Europe.

As noted above, Japan still has substantial issues with aging demographics and government debt. One thing going in Japan’s favor is that its healthcare costs per capita are approximately 1/3 of those for people in the United States, according to the World Bank and US Centers for Medicare and Medicaid Services.

Today, we have similar predictions that China will overtake the United States. China is a much larger economy with a substantially larger population than Japan. However, it also has substantial debt issues, real estate issues, civil unrest issues, and demographic issues that will cause its population to drop dramatically in size over the decades. I have written about this before, and you can read about this more, if you'd like at the link below.

https://www.impelwealth.com/blog/from-shopping-malls-to-nursing-homes-1

Japan's stock market took over three decades to “find its way back.” While people were sure that Japan would overtake the United States, issues that were not known or weighed correctly at the time caused this not to play as people expected. We shall see if similar economic and demographic patterns play out with predictions about China.

As there has been a lot of talk about the resurgence of the Japanese economy and its stock market, we wanted to put this in perspective for you, our trusted friends, and clients. Please let us know if you have questions about this or if there are other topics you would like us to write about. We aim to keep you informed as we continue “Moving Life Forward.” 

© 2024 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Investors cannot directly invest in indices.

Featured blog image source: iStock.com/manassanant pamai