The Japanese economy seemed to have no limits in the 1980s. The economy grew rapidly, with a peak growth rate of 6.7% in 1988. This was a result of the robust expansion of the 1960s and 70s. Land in Tokyo can cost up to four times as much as Manhattan’s equivalent.
In the 1980s the rules governing the banking sector were liberalised, leading to a dramatic increase in credit flows throughout the economy. This lending was largely focused on the real estate market, which combined with a relaxed monetary policy drove land prices up to exuberant heights.
Investor confidence in Japan’s economy continued to grow rapidly, causing the Nikkei Index of Japan’s largest companies to reach a high of 38,915 at the end of the decade.
The Japanese “economic miracle”, which had been gaining momentum, came to an end when policymakers tightened the monetary policy.
Analysts concluded that the Nikkei could not return to its peak during boom times. The index has risen by over 9 percent in 2024, surpassing its peers to reach a high of 36.546.95, a record for 34 years.
Similarities exist with the economic situation of the 1980s. The monetary policy is extraordinarily accommodative. The Bank of Japan was the only central bank that ignored the global inflation spike and left interest rates at minus 0.1%.
Daniel Hurley said that these low rates would continue to support the domestic demand. He is a Japan equity specialist for T Rowe Price. These rates will make Japanese stocks more attractive than government bonds, and increase the value of earnings.
Bank of Japan is yet to outline concrete plans for winding down its yield control policy. This involves the purchase of bonds of different maturities to maintain the rate of the 10-year Japanese Government Bond, which is the benchmark of the economy. Kazuo Ueda has not yet made any indications that the strategy will change soon, despite being highly anticipated.
The yen has been weakened by the Bank of Japan leaving rates at negative levels while the Federal Reserve raised them aggressively, to a range of 5,25 to 5,5 per cent. This is a 23 year high.
Bank of America analysts, Wall Street’s investment bank, stated that the yen would not gain any ground against major world currencies as long as the Bank of Japan maintained extremely loose financial conditions, which “would sustain the market rally”.
In addition, stock indices with a high weighting in technology stocks will be big winners in 2023. Wall Street’s Nasdaq has risen by around 35 percent in the last year. The FTSE 100 index, which heavily relies on “old economy” stocks like miners and oil companies, has fallen by around 4 percent for the same time period.
The Nikkei is home to major tech manufacturers, such as Sony, Mitsubishi and Hitachi. Richard Hunter, Interactive Investor’s head of markets, stated that the index had benefited from “technology gains seen elsewhere”.
The government is heavily focused on exporters. This includes car makers such as Nissan Toyota and Honda. Hurley stated that the US economy looked robust, and this, along with a weaker yen “should help Japan’s exporters”.
Investors drastically reduced their expectations of how long the Fed or European Central Bank will keep interest rates high in the last months of the year. This led to a rally on the stock and bond markets. Japanese stocks, however, were notable for their absence from this frenzy of buying.
Goldman Sachs analysts claim that Japanese equities are quickly making up the underperformance in the last two month of 2023, during the first months of 2024.
The Nikkei has also benefited from the efforts of the Japanese government in encouraging retail investors to participate on the stock markets. This month, the annual investment allowance for Japan’s most popular retail investment vehicle, the Nippon Investment Saving Account (NISA), was raised to $24,000. The vehicle allows income generated to be exempted from Japan’s 20% capital gains tax.
Russ Mould is the investment director at AJ Bell. He says that despite the recent surge in Japanese shares, UK investors and their financial advisors have not yet pushed into the market. The top 50 most purchased funds on the investment platform do not include any Japan-focused trusts, and the iShares Japan Equity Index Tracker Fund is only 36th.
There are some reasons that investors might be more interested. “Japan underperformed horribly over a long period of time. Unloved means undervalued. Japanese stocks do appear attractively priced on an earnings basis and also in relation to book value. This is especially true as much of the book value is made up of cash”, Mould said.
Some point out that the corporate governance is being reformed in a more shareholder-friendly manner. Takeover of Toshiba by Toshiba last year was cited as proof of a shift in culture. It also showed a greater openness to mergers, acquisitions, and a less tolerant attitude towards poor management.
The central bankers of Japan smashed the Japanese bubble in three decades by tackling inflation. In the 30 years that have followed, Japan has experienced a persistent deflation. This led to unconventional measures by the Bank of Japan in order to increase demand.
After years of dormancy the Japanese economy experienced inflation in 2022-2023. The peak was over 4 percent, which is a four-decade record. The Bank of Japan, in contrast to other major central banks around the world, remained steadfast. This could be because they feared a repeat of the poor economic performance of the 1990s. For the moment, the Nikkei is the biggest beneficiary of this anxiety.
Japan is no longer a major and essential part of UK investors’ portfolios (Patrick Hosking). In the 1980s the UK fund industry created a number of specialist funds in order to take advantage of what was then considered the world’s miracle economy.
The bubble burst and the market fell for 19 years. Japan now accounts for only 6 percent of the global stock market, down from 40 percent. This means that it will likely be a small part of most pension funds.
Private investors can still get exposure to Japan in a variety of ways. The cheapest is through an exchange-traded fund (ETF) that attempts to mimic one of the major stock market indices of the country.
BlackRock’s iShares MSCI Japan Fund tracks the 225 Japanese listed firms in the MSCI Japan index and includes many familiar names. Toyota and Sony are its two largest investments. The total cost ratio is 0.12 percent.
Analysts warn against tracker funds which try to mimic the Nikkei, Tokyo’s best-known index. This is because this index is price-weighted. It is a methodology that is questionable, as it is heavily influenced by high share prices.
Vanguard FTSE Japan Ucits ETF is another Japan tracker. It tries to mimic a different index based on Japanese stocks reflected by the FTSE Japan Index. It is a more diversified fund with 511 stocks. The ongoing charge is 0.15 percent.
Investors who prefer to have their investment managed by stockpickers can still choose from a variety of Japan-focused trusts, such as those managed by Schroders JP Morgan, and Fidelity.
The top-performing Japan-focused trust in the last 12 months and five years has been CC Japan Income & Growth Trust. This £240 million trust produced a share price return of 43.6% over this period. It favors companies that are likely to benefit from corporate governance reforms, and it is not afraid to make big bets.
Baillie Gifford Japan Trust, with a value of £640,000,000, is the largest, but it has also been the one that has performed the worst in recent years due to its preference for tech stocks within the country. SoftBank is its largest single investment. It is unloved and trades at 10 percent below its net assets.
Jupiter Japan Income Fund, a fund that is not quoted on the stock exchanges, is highly regarded by many. It is a fund with more than £1billion, and it has 38 holdings. The fund has a large exposure to consumer and financial stocks, as well as technology and industrials. It has generated a return of 145.3 percent over ten years, compared to 113.1 percent for the Topix Index. The ongoing charge is 0.98 percent.
Investors based overseas in Japan should be aware that the stock market moves opposite to the currency over the short term. The gains of a bull phase can be less thrilling, but the losses of a bear market may be less painful after translation into sterling.