In the Tokyo stock market on Feb. 15, the Nikkei average crossed the 30,000-point mark for the first Time in 30 1/2 years since August 1990. Although the profitability of Japanese companies has improved after a long slump following the bursting of the bubble, it has not spawned high-growth companies like the giant U.S. IT firms. The stock market has been pushed higher in large part by monetary and fiscal policies in response to the New Crown (CCP virus) Epidemic. The question became whether it was possible to increase the growth power of companies and maintain high stock prices.
The Japanese economy fell into a long period of stagnation after the bubble burst. Japan’s nominal GDP (gross domestic product) reached $3.1 trillion in 1990, which was then about half of that of the United States ($6 trillion), but is now only $5.1 trillion. Even taking into account Japan’s declining population, there is a huge gap compared to the U.S., which has increased to more than 3.5 times the $21.9 trillion.
Against the backdrop of Japan’s economic downturn, Japanese companies have pushed forward with globalization and structural reforms in order to maintain growth. Murata Manufacturing is expanding its electronic parts business in Asia. Nidec, on the other hand, has launched several acquisitions in Japan and abroad, pushing up earnings. Even domestic companies, such as Uniqlo and other apparel brands, have taken their experience gained in Japan overseas and achieved higher growth in overseas revenue than in Japan.
Sony has transformed its loss-making TV business into a profitable structure that makes money from businesses such as games. Thanks to the efforts of these companies, the net profits of Japanese listed companies doubled compared to 1990, and one out of five companies achieved a new record profit from October to December 2020.
In addition, corporate management that values shareholders has taken root in Japan. According to Japanese corporate statistics, the amount of dividends paid by companies with capital of 100 million yen or more increased from 3 trillion yen in fiscal 1989 to 22.5 trillion yen in fiscal 2019. This, coupled with improvements in return on equity (ROE) driven by the 2014 Corporate Governance Code and other measures, has led companies to focus on capital efficiency.
However, the U.S. is still ahead of Japan. The U.S. Dow Jones 30 Industrial Average has risen from 3,000 points to 31,000 points in the last 30 years, an increase of about 10 times.
In particular, the huge IT companies known as “GAFA” have achieved rapid growth over the past 30 years. The total market capitalization of the top 5 listed companies in the U.S., including Apple, is about 840 trillion yen, higher than the entire TSE1.
As a result of the rise of GAFA, the age of the top 30 U.S. companies in terms of total market capitalization has dropped from “88 years old on average” in 1990 to “44 years old”. In contrast, Japanese companies have not achieved metabolism, and their age has risen from “56” to “66”. According to the international competitiveness ranking of IMD Business School in Switzerland, Japan will fall to a record low of 34th place by 2020.
On February 15, the Nikkei average recovered the 30,000-point mark for the first time in 30 and a half years (Chuo-ku, Tokyo)
The higher stock prices were largely supported by the monetary and fiscal policies of various countries in response to the New coronavirus outbreak. The total assets of the world’s major central banks increased by about 40% in 1 year, and fiscal stimulus on a scale of 5% of GDP was implemented. As a result, spillover funds flowed to financial markets, including stock markets. Although the fiscal stimulus and monetary easing were positive policies aimed at the real economy’s real recovery, they could also lead to new destabilizing factors such as asset price spikes and Inflation.
In addition, the main body of Japanese stock holdings has changed dramatically in the past 30 years. In a nutshell, Japanese people no longer hold stocks, and net sales of stocks by Japanese individuals reached 68 trillion yen over the 30-year period. the shareholding ratio of Japanese individuals, which reached 20.4% at the end of FY1990, fell to an all-time low of 16.5% at the end of FY2019.
In contrast, the shareholding ratio of foreign investors increased from 4.7% in FY1990 to 30.3% in FY2017. In addition, the Bank of Japan (BOJ) is expanding its purchases of exchange-traded funds (ETFs), with holdings reaching 46.6 trillion yen at the end of 2020, making it the de facto largest shareholder of Japanese stocks. foreign investors and the BOJ have been the main buyers of Japanese stocks for 30 years, so the high share price has not widely benefited individuals.
The price-to-earnings ratio (PER), which shows how many times the stock price reached corporate earnings, was about 20 times. Compared to the bubble period when it reached 60 times, the high valuation has diminished, but is at a level above the average of the 2010s (around 15 times). There are many issues that should be addressed in Japan, such as avoiding getting carried away by the high stock prices over the past 30 and a half years, further promoting the cultivation of new companies, and relaxing restrictions.
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