To The Moon

Following the departure of Sadakazu Tanigaki, the late Shinzo Abe was re-elected chairman of the Liberal Democratic Party (LDP) of Japan on Sept. 26, 2012. Except for the 1993-1994 period, the LDP has consistently been the ruling party in Japan since 1955. Shinzo Abe had grand plans to save Japan after two lost decades of stagnation and deflation. The bursting of a double bubble (both in real estate and the stock market) in the early 1990s ensured that. There was an insufficient response by the Bank of Japan, but Shinzo Abe was allowed to appoint a new governor of the Bank of Japan in April 2013. It became Haruhiko Kuroda, and his appointment allowed the Three Arrows policy to become a success.

The first arrow revolved around government investment, the second arrow concerned monetary policy and the third arrow focused on reforming the Japanese economy to optimize its growth potential. In the long run, the third arrow is the only correct path, and thanks to liquidity injections from the government and the central bank, time was bought. This policy soon became known as Abenomics. Since Shinzo Abe's appointment, the Japanese stock market has risen 237 percent. By comparison, the U.S. stock market has risen by only 187 percent over the same period. Thanks to the weakening Yen - from 78 yen to a dollar to 137 yen to a dollar during that period - this stealth bull market was barely noticed outside Japan. Last week, the Japanese stock market reached its highest level in 33 years after foreign investors were firmly on the buying side for six consecutive weeks. But over the past 12 months, the Japanese stock market rose 20 percent in dollar terms and the U.S. stock market rose only 10 percent.

Improved governance in Japan is a major cause of foreign interest. Management of Japanese companies now wants to engage with investors. This is also because the Japanese stock market gives companies with high returns on equity its own index. If "naming and shaming" works anywhere, it is in Japan. Also, the stock market wants the price-to-book value of listed companies to be above 1. Eternal shame on the management of companies unable to do this. Furthermore, the current high inflation is finally ensuring that deflationary thinking is no longer between the ears. An entire generation that has never experienced rising prices must now begin to rethink. The Japanese stock market seems on its way to breaking the highs of December 1989.

Japan is an alternative for companies that no longer want to manufacture in China, especially in terms of high-end products. Companies such as TSMC, Samsung, Micron and Intel are now looking to work in Japan. Geopolitical uncertainty is good for Japan. This week, the new prime minister - Fumio Kishida - is meeting with world leaders as part of the G7. In addition to the G7 leaders, the heads of government of South Korea, India, Brazil and Vietnam are also present.

After decades of moderate deflation, inflation has now risen to 3.4 percent, already 13 months above the Bank of Japan's target of 2 percent. Japan's economy grew 1.6 percent in the first quarter and is only now beginning to pick up steam post-Corona. Key restrictive measures were removed this month. Also notable is the modest wage growth. Furthermore, in addition to the G7, this week's conference of foreign investors has as many as 500 participants. Major fund houses are opening offices in Tokyo. Warren Buffett was in Japan as recently as April when he was expanding his holdings in the five trading houses. At Berkshire Hathaway's last annual meeting, Buffett indicated that he was far from finished investing in Japan. In addition to Buffett, Japanese companies are now getting to know activist shareholders. In 2014, there were only 10 activist funds in Japan; now there are 70. Only thanks to Shinzo Abe has governance improved. Japanese have trouble conforming to foreign influences, but now that the impetus comes from Japanese politics, they have much less trouble with it.

The Japanese stock market is also considered a "warrant on the global economy," given its sensitivity to the economic cycle. Many companies have high fixed costs, so rising sales quickly create rising profits (and vice versa). Nevertheless, investor interest this time is not based on earnings trends but sees room for a higher valuation. The Japanese stock market and also the Japanese yen are cheap. Instead of a double bubble, there is now a double discount. Moreover, there are active programs to push valuation up. Companies that are still severely undervalued risk losing their listing on the Japanese stock market. Dividend payments and share buybacks have therefore risen sharply, but apart from financials, Japanese companies are still sitting on $2.5 trillion in excess liquidity.

Underlying Japan’s economic problems is a shrinking and ageing population

Source: UN population Division

Finally, there is a chance that Japanese institutional and retail investors (the proverbial Ms Watanabe) will focus more on Japan itself. The current YCC policy is unsustainable in the long run, which means that carrying trades by borrowing yen and deploying in a foreign currency will become less popular. That money will then be invested in Japanese companies (after all, there is little value in investing in JGBs). Private Japanese investors are also encouraged to invest in Japan with tax breaks. Foreign investors are also increasingly seeing Japan as a safe haven to invest in Asia. Perhaps not all the objectives of Abenomics have been achieved, but given the deep trough a decade ago, this is still a strong achievement.