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  • Louis Gilmore

Beyond the iron coffin lid: the Nikkei 225 surges, but can Japan reckon with the ghosts of its past?

The Nikkei 225, Japan’s stock index, eclipsed 40,000 points for the first time on Monday 4 March, as loose monetary policy and a weak currency continue to encourage bets in Japan. The Nikkei 225 has risen 17.5% since the beginning of the year, becoming the world’s best performing stock index. The yen, which has remained weak due to low interest rates to stimulate inflation, has boosted profits for exporters who tend to have heavy weighting among the considered stocks. Investors have also pivoted away from slowing Chinese markets amid growing political tensions. 

The Nikkei 225 overtook the previous high of 39,000 achieved in 1989 — a peak Tokyo traders called the “iron coffin lid” — at the height of Japan’s “Bubble Economy”. In 1989, Japanese companies dominated the global market. Of the 50 companies ranked by market capitalisation, 32 were from Japan. Real estate in Tokyo sold for upward of $139,000 per square foot. At that estimation, the Imperial Palace was worth as much as the entire state of California.

The real estate market in Tokyo had experienced an unprecedented surge in prices. With access to enormous reserves of cash, the Japanese outbid competitors for coveted investments anywhere in the world. Japanese companies began buying up any U.S. asset they could get their hands on — auto-makers, the Rockefeller Centre, amongst many others. Some American economists warned of an economic Pearl Harbour. A Japanese take-over even had an impact on American pop culture, evident in the fictional Nakatomi Plaza in ‘Die Hard’ and Japan’s undeniable influence on ‘Blade Runner’s’ dystopian Los Angeles. 

Japanese conglomerates continued to expand and the bubble kept inflating and inflating, eventually catching the attention of the central bank. In attempting to keep inflation in check, the central bank sharply raised interbank lending rates in 1989 - and the bubble burst. 

The Nikkei 225 crashed. Assets and equity prices crashed. Japanese banks had lent with no regard for the quality of the borrower, leaving them with books filled with bad debt. Amid the turmoil, an estimated 17 million graduates could not find new jobs due to a lack of vacancies and labour rigidity. Many found themselves in temporary, low-paying jobs, unable to benefit from the stability, prosperity and fortune of the model that Japan once thrived on. 

Individuals, often in their prime working years, struggled to find stability. Many delayed, or most likely entirely forwent, starting a family and confined themselves. The hikikomori, or Japan’s ‘confined’, withdrew from society and were crippled by a lack of prospects and the pressure of rigid expectations amid tough competition. The lack of integration into the workforce created deep anger against an older generation whose advice was simply to work harder and harder. It was advice that had worked in the post-war miracle, but it could not revitalise the economy this time.

Japan’s economy is still recuperating from the 1991 financial crisis which resulted in two decades of stagnation. It took 12 years for Japan’s GDP to rebound and reach the same levels as that of 1995. The stagnated recovery was a major setback for the country’s overall economic growth and development. 

The breakthrough of the Nikkei 225, amid other factors, has offered relief to investors - perhaps for the first time in nearly three decades. Planned capital investment, encouraged by subsidies for industries such as semiconductors and AI, has peaked for the first since records began. Japanese employers are set to continue raising pay in spring, lifting consumer spending and allowing the Bank of Japan to finally reduce monetary stimulus.

The lost generation has become outspoken in their desire to rid the model of lifetime employment, male domination and age-based hierarchies, coinciding with institutional changes. The average age of CEOs has fallen 12 years in a decade. Many firms are moving beyond old customs of lifetime employment, increasing flexibility and tackling hierarchical wage structures.

Yet, despite these positive trends, the Japanese economy remains fragile—and investors are aware of this. Amongst some, there is a sense of optimism, but the stock market performance does not remove structural challenges, such as depopulation. In Japan, adult incontinence pads outsell babies’ nappies. The population is expected to decline by 30% in 45 years — a fall of nearly 37 million. Japanese women are reluctant to have children, deterred by financial pressures and traditional gender roles that force many to give up work as soon as they become pregnant. 

"The country’s economy is still recuperating from its lost decade and must address structural issues to maintain its momentum."

The Japanese workforce is depleting rapidly, and the economy is at risk of shrinking further, particularly in rural areas. At the end of 2023, the Japanese economy fell into recession and was overtaken by Germany, slipping down into third place. The recession has highlighted the need for Japan to continue to promote structural reforms, such as getting more women into work and lowering barriers to immigration. While Japan has, albeit reluctantly, made some progress in opening borders to foreign workers, it is unlikely that any government will embrace the mass immigration needed to counter depopulation. The Nikkei 225’s breakthrough has been a milestone for the Japanese stock market, but there are other, perhaps more significant, headwinds. The country’s economy is still recuperating from its lost decade and must address structural issues to maintain its momentum. The population is declining, and the workforce is depleting, putting the economy at risk. While Japan is making some progress, whether the country can continue to progress and overcome these issues is unclear. For now, the Nikkei’s success can provide some optimism, but investors and traders alike are sceptical about whether it reflects a broader economic revival.

Image: Flickr | Dick Thomas Johnson



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