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The stock market is not the economy\u2014just look at what\u2019s happening in Japan.\u00a0<\/p>\n
Japan\u2019s equity markets broke a record<\/a> on Thursday, when the Nikkei 225 closed at 39,098.68. It\u2019s not just an all-time high, but an important psychological threshold: The original record was set all the way back on Dec. 29, 1989, near the peak of the country\u2019s bubble economy.\u00a0<\/p>\n Japan\u2019s market crashed soon after, dropping by 60% in just a few years. The economy went into an extended slump, leading to what\u2019s been termed the \u201cLost Decade<\/a>\u201d as the country\u2019s growth lagged other developed economies, a phenomenon that even became known as \u201cJapanification<\/a>.\u201d\u00a0<\/p>\n Yet despite the recent bull run in Japan\u2019s markets, the country\u2019s other economic data doesn\u2019t look quite so rosy. Japan slipped into a technical recession<\/a> last quarter, after its economy shrank by 0.4% at an annualized rate, which means that it had two straight quarters of declining GDP, regardless of whether economists officially dub it a recession. It also slipped a spot in the global GDP rankings, falling into fourth place behind Germany in dollar terms.\u00a0<\/p>\n The country faces an array of economic challenges. A weak yen is making Japanese imports more expensive<\/a>, hurting Japanese consumers and companies that rely on foreign energy, food, and other goods. Japan\u2019s population has also shrunk<\/a> for 14 years straight, reporting its steepest decline last year.\u00a0<\/p>\n But investors don\u2019t seem to care, as strong earnings and a revived focus on corporate governance are encouraging foreign investors like Warren Buffett<\/a> to pile funds into the Japanese markets.\u00a0Fortune<\/em> looked under the hood at the Japanese version of the split between Wall Street and Main Street and found that \u201cnot that bad\u201d can be very good indeed. A developed economy like Japan\u2019s isn\u2019t going to always grow like crazy, and that\u2019s more than okay.<\/p>\n Japan\u2019s return to record highs is really making up for lost time \u201cafter a long, quite lethargic performance,\u201d Louis Kuijs, the chief Asia-Pacific economist for S&P Global Ratings, said to Fortune <\/em>last week.\u00a0<\/p>\n Last month, Toyota Motor set a record for the highest market valuation for a Japanese company when it reached a valuation<\/a> of 48.7 trillion yen ($323.5 billion), surpassing the record set by Japanese telecoms company NTT back in 1987.\u00a0<\/p>\n Toyota is worth 57.5 trillion yen, or $381.6 billion, today. NTT, by comparison, is worth just 16.4 trillion yen ($108.6 billion).<\/p>\n Foreign investors keep on pumping money into the Japanese stock market, injecting a net $14 billion in January alone, according to the New York Times<\/em><\/a>,<\/em> <\/em>citing Japan Exchange Group.\u00a0<\/p>\n One reason for investor optimism over Japan is a stronger corporate sector. Earnings for the last quarter of 2023 were 45% higher year-on-year, according to Goldman Sachs analysts<\/a>. That\u2019s partly due to the weak yen, which makes Japanese exports from companies like Toyota cheaper overseas.\u00a0<\/p>\n Japanese markets are also pushing the country\u2019s sprawling conglomerates, known as keiretsu, <\/em>to streamline their complicated organizational structure.\u00a0<\/p>\n \u201cAnyone who has seen a typical keiretsu corporate structure will understand\u2014it looks like a bowl of ramen noodles,\u201d Herald van der Linde, HSBC\u2019s chief Asia equity strategist, wrote in late January. \u201cThese complex corporate structures often come with extra seasonings\u2014weak return on capital, low pay-outs, and fewer share buybacks.\u201d<\/p>\n That lack of dynamism is reflected on Fortune\u2019s Global 500 list, which ranks the largest companies in the world by revenue. Japan\u2019s presence on the list, which has shrunk significantly<\/a> since the ranking\u2019s inception in 1995, does not include the country\u2019s version of Meta, Tesla or Alibaba. The most recent Japanese company to join the list, Toyota Tsusho, has been a Global 500 company for 15 years, just under half the list\u2019s existence.\u00a0<\/p>\n But that\u2019s changing. \u201cDynamism is returning to the Japanese economy,\u201d Morgan Stanley analysts wrote in a research note earlier this week. \u201cCorporates are witnessing record profits and changing their pricing behavior, as well as innovating new strategies to grow,\u201d they continue.<\/p>\n Tokyo\u2019s stock exchange is also doing its part. Last year, the exchange asked companies to do more to improve profitability and valuations, and started to scrutinize the close relationships between parent companies, subsidiaries, and other cross-holdings.<\/p>\n In January, Tokyo\u2019s exchange said it would start listing companies that disclosed plans to improve capital efficiency in a \u201cname and shame<\/a>\u201d strategy. The exchange has also proposed<\/a> that companies that don\u2019t shape up could be delisted by 2026.<\/p>\n But while the corporate sector looks optimistic, other parts of Japan\u2019s economy look shakier. Private consumption dropped by 0.2%<\/a> in the final quarter of 2023, compared to the previous quarter. Business investment also dropped by 0.1% over the same period.\u00a0<\/p>\n Japan\u2019s shrinking population<\/a> also poses a major economic challenge in the long term. The country\u2019s median age is 49.1 years, compared to 38.1 in the U.S. Japan will soon need to rely on a smaller number of working-age people to support a growing elderly population. Tokyo has deemed the issue<\/a> \u201ca challenge that cannot be postponed,\u201d but current policies have yet to reverse the decline.\u00a0<\/p>\n Yet economists are cautiously optimistic that Japan might be able to reverse long-running deflation\u2014and become more of a normal economy again. Analysts point to rising wages amid a tighter labor market, with major companies like Toyota<\/a>, Nintendo <\/a>and Uniqlo-owner Fast Retailing<\/a> hiking pay last year.\u00a0<\/p>\n Many economists, before Japan released preliminary economic data last week, expected that the Bank of Japan would raise interest rates in April\u2014the first hike<\/a> since 2007.\u00a0<\/p>\n The surprise recession might affect that schedule. \u201cThe recent GDP growth numbers are definitely a bit of a setback for the prospect of interest rates going up,\u201d Kuijs suggested.\u00a0<\/p>\n Yet \u201cif things work well, we could be on a path towards more sustained wage growth in the labor market, underpinning more normal inflation and therefore a more normalized monetary policy,\u201d he continued.<\/p>\n The economist also noted that, for all the negative headlines on Japan over the past few decades, its economic data is \u201cnot that bad,\u201d pointing to real GDP growth per capita and productivity per working hour per person in particular. And, in the end, observers should be realistic about what a mature economy can do.<\/p>\n \u201cDon\u2019t expect much more than 1% real GDP growth in the long run,\u201d Kuijs said.<\/p>\n<\/div>\nWhy are Japan\u2019s markets doing so well?<\/strong><\/h2>\n
What about Japan\u2019<\/strong>s economy?<\/strong><\/h2>\n