New figures show Japan’s economy shrank at an annual rate of 0.4 per cent in the final quarter of 2023. That meant that Germany supplanted it as the world’s third-largest economy, which is surprising given that Europe’s economic powerhouse has endured a succession of zero or negative growth quarters.
To an extent, both countries have been hobbled by a slowing pace of recovery in some of their largest export markets, although in the case of Germany there can be no doubt that economic challenges have intensified due to structural problems linked to the nation’s energy supplies – essentially self-inflicted wounds.
The mood music in Tokyo is a little cheerier, even if it isn’t necessarily backed by hard data such as gross domestic product (GDP) figures. In a January economic update, the Bank of Japan (BoJ) said that as a “virtuous cycle from income to spending gradually intensifies, Japan's domestic economy is projected to continue growing at a pace above its potential growth rate”. Such outperformance on an admittedly sketchy basis assumes a significant “materialisation of pent-up demand”, while the virtuous cycle referred to by the BoJ relates to improved expectations in relation to wage growth and its projected knock-on effect on prices.
Alas, with real wages dipping for the 20th straight month in November, there is scant evidence to back this scenario yet. Nonetheless, the country’s consumer price index has been increasing in the range of 2-2.5 per cent, and inflation expectations “have risen moderately”. This represents progress of sorts, strange as it may seem.
Clearly, Japan’s lost decade casts a long shadow. The BoJ believes that “behaviour and a mindset based on the assumption that wages and prices will not increase easily have taken hold in society”. Considering the country’s economic experience since the early 1990s, it is not difficult to appreciate why such an attitude may have become ingrained.
There isn’t much chance that a parallel view on wages and prices will emerge in the UK, although fears have mounted that we are already locked into an era characterised by similarly sluggish economic growth. The same charge has been levelled at other European economies, even mighty Germany, but the reality is that despite sky-high public debt and crumbling infrastructure, the UK has thus far avoided the deflationary spiral that held back the Japanese economy.
According to Trading Economics, Japan’s economy has grown at an average annual rate of 0.43 per cent since 1980. The UK hasn’t fared much better since the global financial crisis, registering a per capita annual growth rate of 0.6 per cent, representing a 0.2 percentage point shortfall on the average rates seen for the US, France and Germany. If you were to draw any meaningful parallels between Japan and the UK, you would need to draw some conclusions as to the impact of accommodative monetary policy on the countries’ respective export- and services-led economies, along with what happens when central banks turn off the spigots.
A more worthwhile examination, at least in terms of this publication, centres on Japan’s attempts to reform its stock market by encouraging listed companies to implement policies designed to improve profitability, shareholder returns, and valuations. Tokyo is keen to do away with outmoded corporate governance standards which have acted as an impediment to M&A and shareholder returns, not least because Japanese corporations have a demonstrable tendency towards the hoarding of cash.
The determination of Japan’s Ministry of Economy, Trade and Industry to unshackle the country’s publicly traded cohort has convinced analysts at US asset manager Capital Group that “there is greater alignment between [Japan’s] companies and the government”, which “may well result in improved shareholder returns through divestitures, higher dividend payouts and share buybacks”.
Confidence on that score is arguably already feeding through to valuations. The benchmark Nikkei 225 index has gained 40 per cent over the past 12 months. Yet Japan still has a relatively high proportion of publicly listed companies trading at a discount to book value or with hefty net cash positions. Japanese industry is synonymous with innovation and a predisposition towards R&D, but that doesn’t explain why shareholder returns have historically taken a back seat. Again, however, change could be afoot. Based on compiled forecasts, Nikkei Asia predicts that dividends from Japanese companies will total JPY15.2tn (£80bn) during the fiscal year ending March 2024, hitting a new high for the third consecutive year.
Despite the year-on-year improvements, Japanese companies still return a much smaller share of net income to shareholders than their European and American counterparts, but it’s a narrowing differential. Overseas capital has increasingly sought out Japanese exposure in anticipation of a changed corporate mindset, but it’s not too late to reap the benefits of Tokyo’s corporate governance reforms.
