Golden Week - more gilded than usual
Golden Week in Japan is more gilded than usual this year. The traditional string of public holidays in early May has been padded out with extra celebrations to welcome a new imperial era - Reiwa - as Emperor Akihito steps aside in favour of his son, Crown Prince Naruhito. The new era begins on Wednesday, but the holiday lasts all week and the Japanese stock market will be closed until next Tuesday.
There is no good reason to think that the transition should trigger a sea change in the fortunes of Japan’s long-suffering investors, but they could be forgiven for hoping it might. The Heisei era, which began in January 1989, will not be remembered fondly by anyone exposed to the protracted deflation of a stock market and real estate bubble that peaked in the first year of Emperor Akihito’s reign. Thirty years later, the Nikkei index is valued at little more than half its peak.
I lived in Japan for a year in the late 1980s when the country was a very different place. This was the era of ‘Japan as number one’, when the value of the Tokyo stock market was one and a half times that of America’s, most of the world’s biggest companies were Japanese and the land on which the Imperial Palace stands was worth more than the whole of California. The sound-track to my walks around Japan’s futuristic urban landscape was played through a Sony Walkman (Pet Shop Boys, as you ask). The internet boom was a decade away. China’s reforms were only just getting going.
In the 30 years since then, Japan has pretty much stagnated while much of the rest of the world has been transformed. The economic challenge facing Japan is in large part demographic. The country’s population peaked in 2000 at 128 million, having grown from 44 million a century before. By the middle of this century, more deaths than births each year will see that fall to 100 million and to 85 million by 2100. Japanese women have just 1.4 children on average.
That is putting enormous strain on an already heavily indebted economy. Too few workers supporting too many pensioners is a problem many countries will face in the 21st century but Japan is showing us the way. The median age of the Japanese population is the oldest in the world.
Japan is still a wonderful country. The parts that ‘bridges to nowhere’ fiscal stimulus have not yet concreted over are beautiful, it’s the safest place in the world, the food is fantastic, and everything works.
But it has enormous challenges. A deep-seated anxiety about cultural dilution means there is a lack of seriousness about the managed immigration that alone can solve the population problem. There is a profound aversion to risk, exemplified by half of financial assets being held in cash, earning nothing. Just three of Fortune magazine’s 2018 list of the world’s largest companies, by revenue, were Japanese.
This combination of headwinds does not sound like a great case for investing in Japan and overseas investors were significant net sellers of Japanese shares in 2018. But there is a price for everything and, arguably, sentiment towards the Tokyo stock market has fallen too far, especially compared with Wall Street, which last week hit a new all-time high after a decade of economic expansion. At the start of the Heisei era, shares in Japanese telecoms giant NTT were valued at more than 100 times annual earnings. Today, stock market index group MSCI calculates that Japanese shares are valued at just 13 times last year’s earnings, much lower than the global average of 18.
While Japan is clearly not immune to a global slowdown and boasting a trade surplus with the US it is, like China, in Donald Trump’s trade-war sights, there is plenty to be positive about in the Japanese economy. Since the election of Shinzo Abe as Prime Minister in 2012, a series of positive reforms has seen the economy grow to a new record size for the first time since the 1990s. The lost decade of deflationary stagnation appears to be over. Recent corporate surveys show boardroom sentiment holding up and capital investment stands at record levels. The labour market in Japan is noticeably tight, with the lowest jobless rate since the 1970s. That is leading to real wage growth and rising consumer confidence.
Perhaps the biggest positive for the Japanese economy is the way in which relaxed visa regulations have opened the country up to tourism from China and Korea. The number of overseas visitors to Japan has risen from around 5 million a year in 2010 to a forecast 40 million in 2020 when the country will stage the Olympics for the first time since the 1964 Games which marked the country’s arrival on the global economic stage.
Finally, the policy backdrop continues to be positive. Growth was an upwardly-revised 1.9% in the last quarter of 2018, on a par with the rest of the developed world. The Government last month passed a £700bn budget designed to inject stimulus via rebates on cashless purchases and vouchers for low-income households. This should offset the impact of a planned increase in VAT to 10pc in the autumn. Interest rates remain at rock bottom and there is no sign of that changing.
So, as the sun rises on the Reiwa era this Wednesday, it’s a mixed report card for Japan’s new Emperor. The demographic headwind is immense, but this most resilient of countries has handled far bigger challenges.