Bi-Weekly Geopolitical Report – Is Japan Back? (April 8, 2024)
by Thomas Wash | PDF
In the early 1960s, futurologist Herman Kahn boldly predicted Japan’s economic dominance. He envisioned the nation surpassing the United States in per-capita economic output by 1990 and matching its total economic output a decade later. Kahn’s vision seemed imminent, fueled by Japan’s rise as a major exporter of autos and semiconductors. Japan’s advantages stemmed from its relatively cheap labor force, weak currency, and lower borrowing costs, which gave Japanese companies a significant edge over their American counterparts.
Just as Japan appeared poised to realize Kahn’s vision at the end of the 1980s, a series of setbacks plunged the nation into a prolonged economic slump spanning multiple decades. The yen surged, doubling in value against the dollar from 1985 to 1988, while decreased borrowing costs in the US eroded the competitiveness of Japanese exports. Concurrently, Japan’s aging population exacerbated the existing challenges. Additionally, the country grappled with an insurmountable commercial real estate debt crisis, triggering a protracted period of asset deflation.
Decades later, Kahn’s unfulfilled prophecies seem like a distant memory. Nevertheless, signs point to a genuine turnaround, with the Nikkei 225 recently reaching a new record high for the first time in 34 years — just the tip of the iceberg. The return of inflation, rising wages, and a modernizing corporate culture all suggest a more sustainable recovery. Japan’s apparent reemergence is perfectly timed as investors seek alternatives to an increasingly insulated China and growing desires from the West to strengthen allies in the Indo-Pacific.
To assess the longevity of Japan’s recent stock market swell, this report delves into its historical performance, including past periods of economic stagnation. We then examine recent changes within the country, particularly the initiatives designed to bolster corporate profitability and stock valuations. The report explores how the intensifying rivalry between the US and China has contributed to Japan’s increased attractiveness to investors. Finally, we conclude by analyzing the potential market ramifications of this resurgence.