As countries around the world are rolling out vaccination programs, global markets are optimistic of an economic reboot. In addition to the Dow Jones and S&P 500 hitting all-time highs, the Nikkei 225 rebounded to 30,000 points in February, setting a new 30-year high. In an interview with Apple Daily, Eisuke Sakakibara, former Finance Ministry official, who was known as “Mr. Yen,” said he believed that the surge in global stock prices is driving up Japanese stocks. Although the index is currently down to 29,000 due to the resurgence of the epidemic, he is optimistic that Japan’s economic growth will exceed 5% this year, and the yen will appreciate to 100 to 105 by the end of the year.
The five Japanese stocks previously acquired by Warren Buffett have already outperformed the Nikkei 225 during the year, and some say Japan has emerged from the “lost 30 years.” Is this true or not?
Eisuke Sakakibara, who served as the vice minister of finance for international affairs from 1997-1999, earned the nickname “Mr. Yen” when he worked with the U.S. to intervene in the foreign exchange market in the 1990s and devalued the yen to below 100. With regard to the “lost 30 years” idea, he replied that he did not agree that the years from 1991 to 2021 were “lost” and that Japan’s growth rate dropping to 1% was only the result of economic maturity.
After World War II in 1945, Japan’s economic outlook was not favorable and had lost its overseas markets, especially given the hostility exerted by those countries that had been invaded. With a fixed exchange rate of 360 yen per U.S. dollar, Japan was able to use the expansion of exports to make a comeback, with the value of exports rising 20-fold to US$16.7 billion between 1950 and 1969. By 1955, the Japanese economy had returned to pre-war levels.
In 1970, under the increasing pressure for an appreciation of the yen, Japan finally switched to a floating exchange rate with capital controls and encouraged the outflow of capital into international markets. Sakakibara described the period from 1953 to 1973 as a period of high growth, when the economy grew at an average rate of 9.1% per year.
By the 1980s, Japan had leapt to become the world’s second-largest economy. However, then Japanese Prime Minister Yasuhiro Nakasone tried to strengthen the yen so that Japanese capital could expand overseas, and at the same time, the U.S. wanted to resolve its huge trade deficit. As a result, in 1985, the G-5 nations—the U.S., Japan, the U.K., France and West Germany—signed the Plaza Accord to depreciate the U.S. dollar by intervening in currency markets. To their surprise, the Japanese yen appreciated by 20% in just three months, with the dollar trading at 200 yen, and the rising value of exports hit the local manufacturing industry.
In order to stimulate domestic demand, Japan lowered interest rates five times in succession, causing massive credit flows to real estate and the stock market, which quickly developed into a bubble. In 1988, the total market value of the Japanese stock market reached 477 trillion yen (US$4.3 trillion), surpassing its GDP of 387 trillion yen for the first time. Moreover, it was 36% higher than the U.S. stock market, making it the largest stock market in the world. The housing market also showed remarkable speculation, and in just four years between the end of 1985 and the beginning of 1990, urban land prices soared twofold. There were claims such as “the mortgage of one house will need to be paid off over three generations” and “if you sell a property in Tokyo, you can afford to buy the entire U.S.,” but the U.S. is 15,000 times larger than Tokyo. Eisuke Sakakibara said that in this period of rapid economic expansion between 1974 and 1990, the average economic growth rate actually dropped to 4.2%, which should be called a period of stable growth.
However, the Nikkei collapsed on December 29, 1989, after reaching a high of 38,957 points. Following the economic bubble burst, Japan plunged into a 30-year recession. During this period, the Bank of Japan (BoJ) tried to reform its monetary policy by raising its interest rate to 6% several times, which led to a major exodus of foreign capital and the impossibility of Japanese people to repay their debts. After several financial crises, the Japanese stock market bottomed out on March 10, 2009, closing at 7,054 points.
It was not until 2012, when Shinzo Abe was re-elected prime minister, that Japan’s economy began to show signs of improvement. His “three arrows” approach to Abenomics consisted of ultra-loose monetary policy, expansion of fiscal spending, and structural reforms, while setting a 2% inflation target. Abe’s program, coupled with the BoJ’s purchase of Japanese government bonds (JGB) and the persistently low-interest rates, had kept the yen in depreciation and successfully stimulated exports. In 2015, the Nikkei 225 reached 20,952 points, the first time since 2000 to break the 20,000-point barrier.
However, many commentators criticized Abenomics for not being effective, as structural problems such as the aging population, increasing idle corporate capital and sluggish domestic demand remain unresolved. With the onslaught of the pandemic last year, Japan’s GDP shrank by 27.8% year-on-year in the second quarter, falling into the most severe recession in 65 years, and rendering any previous efforts of Abenomics futile. Later, the global capital was flooded with money with the central banks of various countries pump priming. In addition, Japan accelerated the acquisition of exchange traded funds (ETF), resulting in double-digit GDP growth of 21.4% and 11.7% in the third and fourth quarters respectively. The stock market also regained 30,000 points in February this year, recovering 30 years of lost ground.
In his analysis of Japan’s economy, Eisuke Sakakibara differs from other economists in that he believes that Japan has never been lost, but in a state of economic maturity. While many commentators blamed the 1985 Plaza Accord for the economic meltdown, Sakakibara argued that while the agreement had briefly caused Japan’s exports to lose their competitiveness, the country had managed to overcome difficulties by taking advantage of the appreciation of the yen and migrating production overseas. Moreover, the slow growth Japan has experienced over the past 30 years is the result of economic maturity, and that even a 1% growth rate is sufficient.
Eisuke Sakakibara raved about the monetary policy reforms of Abenomics, saying that Abe’s appointment of Haruhiko Kuroda as the BoJ governor, who subsequently implemented an aggressive quantitative easing monetary policy, led to a rapid depreciation of the yen against the U.S. dollar, a 60% rise in the BoJ share price, and an increase in economic growth to 2% in 2013, demonstrating the effectiveness of the program.
Regarding the stock market, even though the Nikkei has surged to 30,000 points this year, there is still a shortfall of more than 20% from the high point. The current price to earnings (P/E) ratio of the Nikkei 225 Index is about 33 times, and the expected future corporate earnings are expected to rise by 60%, with the projected P/E drop to 21 times in the following year. With valuations back on track, even Buffett, the god of stocks, has made some rare moves.
Last year, Warren Buffett’s Berkshire Hathaway acquired a 5% stake in five Japanese trading houses, namely Itochu Corp., Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., and Marubeni Corp. The five Japanese companies are mainly engaged in trade distribution and finance, etc. At that time, the P/E ratios were less than 10 times, and each of these five Japanese stocks recorded gains of 10% to 30% this year, outperforming the 6% return of the Nikkei.
The 10 largest Japanese stock names by market capitalization today are distributed across various industries and sectors, such as automotive (Toyota), technology (SoftBank, Sony), manufacturing (Keyence, Nidec) and retail (Fast Retailing Co).
Paul Pong, managing director of Pegasus Fund Managers, said that after the outbreak of the pandemic last year, countries worldwide have been pump-priming, flooding the market with liquidity. Moreover, thanks to the global enthusiastic demand for technology, Japan’s corporate earnings growth has been strong, especially for chips, automobiles and other export manufacturers. It is believed that export trade will be even more robust under the economic recovery, and is expected to boost the Nikkei 225 to 30,000 points again this quarter. While company valuations are still low, there will not be a bubble in Japanese stocks again.
Eisuke Sakakibara expressed confidence in the future of the economy, expecting Japan’s economic growth rate to rise by more than 5% in 2021. He also believes that the Tokyo Olympics will help significantly in Japan’s recovery. He expects a slow appreciation of the yen against the dollar, with the exchange rate ranging from 100 to 105 yen by the end of the year.
However, Japan is facing not only economic difficulties, but also the social sequelae of the prolonged economic downturn. Paul Pong pointed out that Japan is experiencing the issues of population aging, “low desire among young people” and other phenomena, resulting in weak domestic demand. The Tokyo Olympics, which was originally hoped to stimulate consumption, may not be able to accommodate tourists due to the impact of the pandemic. He stated that Japan “has been yearning for inflations for years,” and that reasonable inflation means that the economy is growing. However, the Japanese government compelled telecommunications companies to reduce prices at the end of last year, and market price reductions mark the beginning of deflation.
Whether the Japanese economy can pull itself out of the abyss, in the long run, will depend on two key factors. First, the U.S. stock market is expected to hit a new high this quarter, but many investors will seize the opportunity to liquidate their positions because they are worried that the market will adjust after Biden’s corporate tax increase in June. By that time, a portion of the capital will flow to Japan to avoid risk, then the dollar will fall and the yen will rise again, which will be detrimental to Japanese exports.
Secondly, if the U.S. economy can reboot in June, consumption will resume with a vengeance, stimulating Japanese exports. Thereafter, whether Japan can grasp this opportunity to carry out economic reform is dependent on the Japanese.
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