The stock market isn’t the economy—just have a have a look at what’s happening in Japan.
Japan’s equity markets broke a record on Thursday, when the Nikkei 225 closed at 39,098.68. It’s not only an all-time high, but an important psychological threshold: The unique record was set all the way in which by which back on Dec. 29, 1989, near the peak of the country’s bubble economy.
Japan’s market crashed soon after, dropping by 60% in just a variety of years. The economy went into an prolonged slump, leading to what’s been termed the “Lost Decade” since the country’s growth lagged other developed economies, a phenomenon that even became often generally known as “Japanification.”
Yet despite the recent bull run in Japan’s markets, the country’s other economic data doesn’t look quite so rosy. Japan slipped right right into a technical recession last quarter, after its economy shrank by 0.4% at an annualized rate, which suggests that it had two straight quarters of declining GDP, regardless of whether economists officially dub it a recession. It also slipped a spot within the worldwide GDP rankings, falling into fourth place behind Germany in dollar terms.
The country faces an array of economic challenges. A weak yen is making Japanese imports costlier, hurting Japanese consumers and corporations that depend upon foreign energy, food, and other goods. Japan’s population has also shrunk for 14 years straight, reporting its steepest decline last yr.
But investors don’t appear to care, as strong earnings and a revived give attention to corporate governance are encouraging foreign investors like Warren Buffett to pile funds into the Japanese markets. Fortune looked under the hood on the Japanese version of the split between Wall Street and Essential Street and positioned that “not that bad” could also be excellent indeed. A developed economy like Japan’s isn’t going to in any respect times grow like crazy, and that‘s greater than okay.
Why are Japan’s markets doing so well?
Japan’s return to record highs is de facto making up for lost time “after a protracted, quite lethargic performance,” Louis Kuijs, the chief Asia-Pacific economist for S&P Global Rankings, said to Fortune last week.
Last month, Toyota Motor set a record for the perfect market valuation for a Japanese company when it reached a valuation of 48.7 trillion yen ($323.5 billion), surpassing the record set by Japanese telecom company NTT back in 1987.
Toyota is value 57.5 trillion yen, or $381.6 billion, today. NTT, by comparison, is value just 16.4 trillion yen ($108.6 billion).
Foreign investors carry on pumping money into the Japanese stock market, injecting a net $14 billion in January alone, in line with the Recent York Times, citing Japan Exchange Group.
One reason for investor optimism over Japan is a stronger corporate sector. Earnings for the last quarter of 2023 were 45% higher yr on yr, in line with Goldman Sachs analysts. That’s partly in consequence of the weak yen, which makes Japanese exports from corporations like Toyota cheaper overseas.
Japanese markets are also pushing the country’s sprawling conglomerates, often generally known as keiretsu, to streamline their complicated organizational structure.
“Anyone who has seen a typical keiretsu corporate structure will understand—it looks like a bowl of ramen noodles,” Herald van der Linde, HSBC’s chief Asia equity strategist, wrote in late January. “These complex corporate structures often include extra seasonings—weak return on capital, low payouts, and fewer share buybacks.”
That lack of dynamism is reflected on Fortune’s Global 500 list, which ranks crucial corporations on the planet by revenue. Japan’s presence on the list, which has shrunk significantly for the rationale that rating’s inception in 1995, doesn’t include the country’s version of Meta, Tesla, or Alibaba. Essentially essentially the most recent Japanese company to hitch the list, Toyota Tsusho, has been a Global 500 company for 15 years, barely below half the list’s existence.
But that’s changing. “Dynamism is returning to the Japanese economy,” Morgan Stanley analysts wrote in a research note earlier this week. “Corporates are witnessing record profits and changing their pricing behavior, along with innovating latest strategies to grow,” they proceed.
Tokyo’s stock exchange will also be doing its part. Last yr, the exchange asked corporations to do more to boost profitability and valuations, and commenced to scrutinize the close relationships between parent corporations, subsidiaries, and other cross-holdings.
In January, Tokyo’s exchange said it could start listing corporations that disclosed plans to boost capital efficiency in a “name and shame” strategy. The exchange has also proposed that corporations that don’t shape up is likely to be delisted by 2026.
What about Japan’s economy?
But while the corporate sector looks optimistic, other parts of Japan’s economy look shakier. Private consumption dropped by 0.2% in the final word quarter of 2023, compared with the previous quarter. Business investment also dropped by 0.1% over the similar period.
Japan’s shrinking population also poses a serious economic challenge in the long term. The country’s median age is 49.1 years, compared with 38.1 throughout the U.S. Japan will soon must depend upon a smaller number of working-age people to support a growing elderly population. Tokyo has deemed the issue “a challenge that may’t be postponed,” but current policies have yet to reverse the decline.
Yet economists are cautiously optimistic that Japan might need the flexibility to reverse long-running deflation—and switch into more of a conventional economy again. Analysts point to rising wages amid a tighter labor market, with major corporations like Toyota, Nintendo, and Uniqlo owner Fast Retailing mountaineering pay last yr.
Many economists, before Japan released preliminary economic data last week, expected that the Bank of Japan would raise rates of interest in April—the first hike since 2007.
The surprise recession might affect that schedule. “The recent GDP growth numbers are definitely slightly little bit of a setback for the prospect of rates of interest going up,” Kuijs suggested.
Yet “if things work well, we is likely to be on a path towards more sustained wage growth throughout the labor market, underpinning more normal inflation and resulting from this fact a more normalized monetary policy,” he continued.
The economist also noted that, for all the negative headlines on Japan over the past few a few years, its economic data is “not that bad,” pointing to real GDP growth per capita and productivity per working hour per person specifically. And, ultimately, observers must be realistic about what a mature economy can do.
“Don’t expect way over 1% real GDP growth in the long run,” Kuijs said.
This story was originally featured on Fortune.com