Innovative Thinking a Key Driving Force Supporting Japanese Stocks, Resulting in Japanese (East Up), Hong Kong (West Down) Stock Markets Phenomenon

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On March 7, the Nikkei 225 Index surged briefly to a historic high of 40,472, breaking the 40,000 mark and way above the 38,957 recorded in Japan’s golden era in 1989. Hong Kong, a close relative in trade and tourism with Japan, on the contrary, is struggling with its own Hang Seng Index (HSI), which has fallen by more than 42 percent during the past three years, reaching a low of 14,794 in 2023, returning to its 1997 level.

The Japanese stock market is often taken as one of the important metrics to assess the health of Japan’s economy during its lost two to three decades. In terms of (stock market) indices, Japan has clearly emerged from its lost decades and is going into a new era. Market analysts point to the depreciation of the yen as the main contributor, but Lew Mon-hung, a former member of the CCP’s advisory body, shared another opinion during an interview with The Epoch Times.

“I think the underlying reason is that the Japanese society inherits a deep-rooted social culture of critical analysis, independent thinking, and free thought, which allows enterprises and individuals to develop their thoughts and knowledge.” He believes that from the perspective of freedom of thought, the situation of rising in the East (Japan) and falling in the West (Hong Kong), can be better explained, and the loss of direction in Hong Kong’s capital market can be revealed, he said.

In fact, even if the Nikkei 225 index is priced in U.S. dollars, it is still up 14 percent year to date, indicating that the rise in Japanese stocks is not just a result of currency depreciation. According to the Nikkie Monthly Factsheet, among the 225 constituent stocks of Nikkei, technology stocks account for 51.12 percent. Not forgetting, there is a smaller item called machinery, which also possesses sizeable technological content. Adding this latter’s 8.41 percent, technology already accounts for nearly 60 percent of the Japanese stocks. On the other hand, according to the HSI information, 34 percent of Hong Kong stocks are financial stocks, and information technology accounts for 26.89 percent. Even when telecommunications and industrial sectors are considered, technology stocks reach just over 30 percent.

Fast Retailing Company Ltd., which owns Uniqlo (9983.T) and others, is the largest component in the Nikkei, and is the forerunner affecting global trends. However, in Japan, some lesser-known enterprises also play important roles as contributors. For example, the robotics company Fanuc (6954.T), the 9th largest among the heavyweights, uses its robots to manufacture its own products. According to Tesla’s (TSLA) 2016 automation strategy blueprint, it was to purchase 1,000 robotic arms from Fanuc and another robotics company, Kuka, for its (electric vehicles) production. Fanuc’s robotic arms are also used in Tesla’s Texas, Berlin, and other car plants.

Technological development comes from personal knowledge and training. Mr. Lew gave an example. Since 2000, 17 Japanese scholars have become Nobel laureates. If Japanese scholars with foreign nationalities are included, the number reaches 22. When that continues, it looks like the goal of creating 30 Nobel laureates in the next 50 years, as proposed by the Japanese government in 2001, is very much in sight.

Going through the archives, the winners not only include the Japanese immunologist Honjo Tasuku, who was jointly awarded in 2018 for his life-saving contributions to cancer treatment, and chemist Akira Yoshino, who in 2019 was jointly awarded for inventing the world’s first lithium-ion battery. He is also an honorary researcher of Asahi Kasei (3407.T). All this scientific research directly elevates the technological level of Japanese enterprises.

According to the Program for International Student Assessment (PISA), Japanese students at the age of 15 scored higher than the OECD average in reading, mathematics, and science. In science, the average score of Japanese students was 547 in 2022, higher than the OECD average of 485. The popularity of science education helps Japanese companies to obtain adequate talent.

Hong Kong students are not low either, with similar scores. In science, Hong Kong students of the same age scored 520, very much on par with their Japanese counterparts. However, Hong Kong’s large companies are mostly finance firms, and many science talents eventually flow into the financial sector or enter universities for purely academic research. There is a lack of companies that would have allowed technology talents to, on the one hand, work for large companies and, on the other, conduct research at the same time as their Japanese counterparts are privileged.

In addition to innovation in technological development, persistence and courage to resist the mainstream are equally important. The latest example is that Toyota Motor (7203.T), Japan’s largest car manufacturer, has finally become widely credited for its earlier skepticism of electric vehicles (EVs). Akio Toyoda, who served as Toyota’s executive director, president, and chief executive for 14 years and is now its chairperson, has always been skeptical about the development of EVs during his time at the helm.

When European and American governments successively introduced policies to replace gasoline-powered vehicles with EVs, against all odds, Toyota announced that EVs would only account for 30 percent of the market at most, that hybrids were still the mainstream, and that it was determined to pursue the development of hydrogen-powered vehicles (technically called Fuel Cell Electric Vehicle (FCEV)).

According to the electric vehicle website electrek, less than 1 percent of the cars sold by Toyota in 2023 were EVs, compared with the 9 percent in Volkswagen (VOW3.FRA), a European manufacturer of similar scale. It is evident that Toyota has not invested heavily and joined the euphoria in EVs.

The American Council for an Energy-Efficient Economy (ACEEE) released its latest report, quoting that the number one “greenest” car in 2024 is the Toyota Hybrid Prius Prime SE. The second and third places are the Lexus EV RZ 300e and the Mini Cooper EV SE, respectively. Tesla is not among the top ten.

The Wall Street Journal commentary also quoted research saying that an EV weighs about one-third more than a plug-in hybrid vehicle, and the braking system and tires release 25 percent more “particulate pollution,” confirms Akiro Toyoda’s persistence (of EV’s skepticism).

Since the emergence of Tesla, different governments and the market itself have adopted a “carrot and stick” tactic toward car manufacturers regarding the introduction of policies that eventually ban the sale of gasoline-powered vehicles. For example, California in the U.S. and the United Kingdom put out plans to stop selling gasoline-powered cars in ten years, and the shares in EV manufacturing companies suddenly became a popular concept.

As soon as any car manufacturer announces its EV plan, its stock will immediately be pursued by funds, which is extremely attractive to directors holding bonus shares. Toyota Motor Company has firmly resisted this route, which they disagree with. This not only proves the unique perseverance of Japanese enterprises but also shows that the Japanese system allows the spirit of criticism, unlike some countries where there are criminal consequences, or where the person in charge of the company has to give up the right to run the company because of public remarks.

It is true that Japan also suffered from falling behind in its core industry due to the lost decades totaling thirty years since the 1990s. One notable example is the seizure of its dominant share in the global home appliance market by South Korea and China. What is even more calamitous is that its dominant position in the chip industry has changed from a leadership role to a supporting cameo, being overtaken by Advanced Semiconductor Materials Lithography (ASML) and Taiwan Semiconductor Manufacturing Co. (TSMC) with their success in the immersion photolithographic IC manufacturing process.

However, Japan still holds important roles in the chip industry; for example, Tokyo Electronics (8035.T), the second largest Nikkei constituent stock, is the fifth largest chip equipment company in the world; Japan Semiconductor Materials, which accounts for about 80 percent share of global demand; Shin-Etsu Chemical (4063.T), the fifth largest heavyweight, is the largest supplier with a market share of 20 to 30 percent, but it is still in more of a supporting role.

Recently, Japan persuaded TSMC to build a chip factory in Kumamoto, which officially opened this year. Through this collaboration with Sony (6758.T) and Toyota, a new opportunity for “reverse learning from younger generations” has shown, to a certain extent, that Japan also possesses the spirit of humility in learning from the best in the field.

After Japan’s stock market crash and the bursting of the property market bubble in the 1990s, Japan entered an era called the “Lost Decades” for the next 20 to 30 years. However, during this period, individuals and companies did not stop pursuing knowledge and ideas, supporting corporate technology and innovation development, cooperating with the current international capital investment, and chasing hot stocks in chips and machinery that are in great demand. Coupled with the weak yen, Japanese stocks are getting cheaper and cheaper. Japanese stocks have taken the chance to take full advantage of the momentum, and the steady pursuit of knowledge and technology has finally paid off.

In contrast with Hong Kong’s property market bubble, which burst in 1997, the HSI has almost returned to where it was after 27 years. The HSI continues to be dominated by the financial sector stocks. The latest fiscal budget uses a reduction in the stamp duties in property transactions as a rescue measure. However, it still cannot get rid of the addiction to the bubble economy.

Coupled with the political environment in Hong Kong, when no one dares to express their opinions freely, it is difficult for corporate management to act as boldly as Akio Toyoda. The current indices showings are like publishing a report with Japan and Hong Kong on the card, the two areas hardest hit by the bubble economy in the 1990s. Compared with Japan in the past thirty years, Hong Kong has still not emerged from the bubble economy that relied on stock and real estate. When the financial and real estate sectors both stalled, the future may be even more uncertain than that of Japan in the past.