Japan Is Back, yet Still Far From Its Old Days

Some people watch at an electronic stock board showing Japan's Nikkei 225 index at a securities firm, in Tokyo on May 25, 2023. Eugene Hoshiko/AP Photo

Commentary

The sudden bull of the Japanese stock market in May called for a thorough review of Japan. Japan used to be excluded from Asia in the past decades, but concentrating on industrialization, its stock market expanded exponentially in the latter half of the 1980s. The recent Japanese stock index (whether Nikkei or Topix) is still below the 1990-year peak. Fair to say, it is not anything outstanding given after the depression, the U.S. stock index took only a quarter century to recover to its 1929 peak. Moreover, Japan’s latest quarterly real GDP YoY growth rate could barely evade consecutive quarters of negligible growth and contraction.

This time might be different because there is a completely new geopolitical landscape. First, Hong Kong has lost its international financial status, especially the used-to-be strong equity market. After the national security law was passed in Hong Kong in 2020, the Hang Seng Index has lost 40 percent to date, while the Japan stock index almost doubled. Second, Japan’s strategic position as a new Asia semiconductor hub sharing or taking over Taiwan’s role is established. It is obvious that Japan will be the new tech-cum-financial centre beyond China’s so-called Greater Bay area.

The overtaking of Hong Kong (stock market) and Taiwan (chips production) by Japan are driven mainly by external forces of U.S. and NATO. However, internal drivers of Japan’s sustainable growth are still lacking. While the external drivers prepare the investment channel, the consumption one still relies on domestic variables, particularly population. Japan’s declining population has been a problem for a long time, and there is not any way out. The population pyramid is still shifting towards the aging side, where the young age proportion is still shrinking.

Japan population and real growth rates. Courtesy of Law Ka-chung

The accompanying chart shows the relationship between population and real GDP growth, both in year-on-year terms. Data from 1900 to now or those from the 1990 bubble burst to now suggest a positive relationship between the two, where the coefficients are both 3 after rounding. That says, a one percent decline in population growth contributes to a three percent decline in real GDP growth. In either case, as the population declines over 0.3 percent (which is already the case now), the real GDP trend would switch from expansion to contraction, a scenario worse than stagnation.

One might expect (professional) immigration due to the dual takeovers. However, there seem no favourable immigration policies offered by the Japanese government. International financial or tech status cannot reverse the fate as these were exactly what Hong Kong and Taiwan did in the past. In fact, Japan’s tech sector has not been inferior at all over the past decades, similar to China. From these, one can see a sustainable strong economy and stock market growth cannot be achieved simply by having these two necessary factors.

The sufficient factors might be more complex and subtle. It seems adding a big nation with positive population growth works. Between 2000 and 2007, mainland China plus Hong Kong together gave this mix. This has become a past tense now that Japan cannot mimic.

While you are bullish on Japan, bear all these in mind.