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As I’m sure you’ve all heard, the Nikkei 225 finally exceeded its Dec 1989 Bubble era peak. Of course, the constituents are vastly different from then (only 77 names are still in the index) and, being a price-weighted index rather than a market-cap weighted one, the index level itself is meaningless. Still, I suspect it made headlines around the world. But it certainly doesn’t feel the same. I was still a college student back then, but I did come back to Japan during the summers to make some money. But it really was crazy. One could easily make $5,000~$10,000 a month doing menial work. Companies would have to pay students to come visit their information sessions and one could get offers from companies they hadn’t even applied to – in fact, I’ve heard stories where they’d send college seniors off to Hawaii after giving them an offer in their junior year so other companies wouldn’t poach them. NTT stock was trading at 200x PER. They say the real estate value of Japan was worth 4x that of the entire United States. You couldn’t grab a taxi unless you paid a premium or it was a long-distance fare and every night was a party. It was truly the golden years, if you were a working adult … I, being a summer part-timer, received some of the bread crumbs but they were pretty big crumbs. And, of course, the bubble had to burst before I started working in 1992.
 
Compare that to now. The preliminary GDP report showed that Japan was in a technical recession (though they just revised Q4 real GDP growth from -0.1% QoQ to +0.1%, thus narrowly avoiding that moniker, although this was still below the median estimate of +0.3%). In the same headline that the Nikkei 225 hit an all-time high, there was an article on the same page stating that Japan has downgraded to the 4th largest economy, losing the number 3 spot to Germany. Real wages are still down 22 months in a row despite the +3.6% increase during the 2023 spring wage negotiations, the highest in 30 years (according to the Japanese Trade Union Confederation which only accounts for the 7 mln unionized employees among the 70 million working population). The JTUC is aiming for over +5% base salary increase this year which, with inflation declining each month, should finally push real wages into positive territory at some point this year. This should, hopefully, provide a boost to GDP whose private consumption, which makes up over 50% of the economy, has been negative for three straight quarters. Still, the consensus forecasts for Q1 do not point to a robust recovery and our interviews with a broad array of companies in diverse sectors suggest a soft start in 2024 with acceleration into the second half.
 
Unlike the crazy 80s bubble, taxis are plentiful and restaurant reservations are easy to obtain. While the extreme pessimism that we felt at the start of 2023 (when real wages hit the lowest level since post financial crisis) has markedly improved, the economy doesn’t feel like an all-time high moment. The stock market continues to be driven entirely by foreigners in February; after foreigners net purchased 3.5 trillion yen of stock throughout 2023, they’ve purchased another 3.0 trillion during the first two months of this year alone. The new NISA program (Nippon individual saving account) that started this January, which is a tax-free program for individuals to encourage investments, was expected to boost participation of individuals. And it has … into global funds and US stocks. According to SBI Securities, the leading online brokerage, the top 3 funds purchased through NISA’s accumulation accounts in February were an all-country index fund, an S&P 500 index fund, and the FANG+ fund (FAANGs plus Nvidia, Tesla, Microsoft, Snowflake, and AMD). NISA does provide a second account for both single stocks (global) and funds. While SBI doesn’t provide rankings for this, other online brokerages like Monex, Matsui Securities, and Rakuten Securities all show that the most popular investments are also an all-country index fund and an S&P 500 index fund (one also included an India fund). The first single stock I saw was Japan Tobacco, probably because of their 5% dividend yield. One could argue that retail investors are rightfully diversifying their investments except that the problem with that argument is that most individuals don’t own any stock. Upon the first chance they get, they decide that they don’t want to buy Japan despite it’s incredible momentum in 2023. I’d also note that all of these index funds are unhedged so they are buying them at 150 yen to the dollar. If the yen strengthens, they will lose money even if the indices are flat. But they are willing to take that currency risk than buying Japanese stocks.
 
As I’ve mentioned many times, the road to stable inflation will be a boon for Japan, something that no one has experienced in 30 years. But, the road will be bumpy, that I am sure.
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Masaki Gotoh

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[no blurb in Feb 2024]

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