Sep 27, 2023

Japan defeats secular stagnation The Land of the Rising Sun’s gross domestic product per capita is the envy of the G7 and a gift to global investors By Matthew Winkler / Bloomberg Opinion As if out of nowhere, everyone’s archetype of secular stagnation is leading the G7 developed economies in life expectancy, per capita growth and, for the first time in decades, an end to the deflation that oppressed chief executive officers and global investors alike. And if that is not enough, this economic juggernaut — better known as Japan — is also providing the biggest US dollar-denominated stock market returns anywhere in the world. The Land of the Rising Sun experienced its largest decline in population last year, or more than 500,000 annually to 125.4 million, and residents are living longer than 84 years on average (fourth among 240 countries). And yet, the world’s No. 3 economy had the most significant per capita increase in GDP from 2013 to last year in local currency terms. That 62 percent appreciation to ￥4.72 million (US$31,672) as the size of its society shrank 2 percent easily surpassed the US (16 percent with a 6 percent rise in population), Canada (45 percent and 12 percent), the UK (48 percent and 5 percent), Germany (32 percent and 5 percent), France (33 percent and 3 percent) and Italy (30 percent and minus-1 percent), data compiled by Bloomberg showed. The Japanese penchant for living longer and prospering to an extent widely unanticipated at the end of the last century is turning out to be a lesson in managing wealth creation for the rest of the demographically challenged G7 and a bonanza for some of the savviest investors. Actively managed exchange-traded funds (ETFs) just poured US$1.5 billion into Japan, the most since data for the US$13 trillion ETF industry was compiled in 2018. The surest sign that money managers worldwide favor Nihon companies instead of allocating their bets to passive indices coincides with the most bullish outlook among G7 markets, with analysts raising their price targets by 10 percent during the past three months, data compiled by Bloomberg showed. Japan equity, as measured by the Bloomberg World Large & Mid Cap Index, has gained 95 percent since 2020, a total return (income plus appreciation) superior to the US (64 percent), Canada (76 percent), the UK (73 percent), Germany (47 percent), France (78 percent) and Italy (84 percent). Toyota Motor Corp, the world’s largest automaker, saw its share price surge to a record ￥2,911 this month after its valuation appreciated 57 percent over the past nine months to US$307 billion. “Over the last three years, it’s been quite a good period to be a relatively contrarian stock picker,” said Colin McQueen, manager of Baltimore’s T. Rowe Price International Value Equity Fund. The fund produced a 23 percent return the past 12 months in US dollar terms, beating all its global peers investing in Japan. Among the 74 mutual funds or ETFs with at least US$5 billion and 10 percent or more invested in Japanese stocks for at least five years, the 56-year-old, London-based McQueen, who started managing the fund in 2019, outperformed his rivals by climbing from No. 16 to No. 1. He doubled the returns generated by the S&P 500 and world equity indices, and crushed the Nikkei 225 by 10 percentage points, data compiled by Bloomberg showed. “Japan has probably been a bit more of a stealth opportunity,” McQueen said during a Zoom interview earlier this month. “It’s been one market where value-driven stock strategies added a lot over the last year” after “a number of stocks that were returned to their COVID lows seemed to be overdone in market pessimism.” The companies contributing most to McQueen’s total return include Matsukiyococokara & Co, Mitsubishi UFJ Financial Group, Sumitomo Corp, Asics Corp, Hitachi Ltd, Nippon Steel Corp, Kao Corp, Nippon Sanso Holdings Corp, Olympus Corp, Taiheiyo Cement Corp and Tokyo Electron Ltd. The prevailing narrative of Japan in terminal dysfunction because of its declining population, seemingly hidebound businesses and perceived resistance to immigrants and greater labor participation, is increasingly debunked by some of the most influential commentators, such as Nobel laureate Paul Krugman and Adam Tooze, the Shelby Cullom Davis chair of history at Columbia University in New York. “Adjusted for demography, Japan has achieved significant growth,” Krugman wrote in a July 25 New York Times column. “Japan, rather than being a cautionary tale is kind of a role model — an example of how to manage difficult demography while remaining prosperous and socially stable.” During the administration of former Japanese prime minister Shinzo Abe, who was assassinated on July 8 last year, “Japanese women did enter the labor market as never before,” Tooze wrote in July last year on his Chartbook blog on Substack. “The fact that a significantly larger percentage of Japanese women are in paid employment than in the United States is a remarkable historical turnaround.” Much of the inspiration for Abenomics came from Kathy Matsui, now a founding general partner of Tokyo-based MPower Partners, who in the 1990s, when she was the sole woman among hundreds of Japanese investment strategists, routinely topped Institutional Investor’s All-Japan team because of her focus on women in the economy. Matsui became the first female partner at Goldman Sachs Japan and argued in her 1999 thesis, “Womenomics,” that increasing participation of women in the workforce would substantially boost Japan’s GDP. Economist Noah Smith, who considers Tokyo “ the new Paris” because of its cultural dynamism, wrote in a 2019 Bloomberg Opinion column that Tokyo’s diversity “is in large part the result of Japan’s increasingly open stance toward immigration” and more recently that “Japan is not an island of racial purity. Instead, it is a fairly normal rich country, dealing with fairly normal issues of immigration, diversity, minority rights, racism and nationhood.” That means “the prospects for Japan look reasonably good as an economy” and “attractive” as an investment, McQueen said. Amid the decline in the working age population, “the big increase in labor force participation, particularly amongst women” coincides with “a trend toward corporate reform to the benefit of shareholders.” The transformation shows no signs of slowing. “The landscape has changed from deflation to inflation,” said Takeshi Niinami, CEO of closely held Suntory Holdings Ltd and chairman of Japan’s Association of Corporate Executives, one of the largest business lobbying groups. “Inflation means the private sector has to take a key role to invest because money is less valuable,” he said during an interview at Bloomberg’s Tokyo office earlier this month. With assistance from Shin Pei Matthew Winkler, editor in chief emeritus of Bloomberg News, writes about markets. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Comments will be moderated. Keep comments relevant to the article. 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