Warren Buffett has struck gold again, as Japan's stock market hits a 33-year high. Is the Japanese economy about to stage a powerful comeback?
For years, Japan's economy has been perceived as lifeless, a case study for stagnation ever since the bursting of its economic bubble in the late 80s and early 90s. It has been nearly three decades since, and yet, out of the blue, the Japanese stock market has reached new heights. What does this mean? Is Japan's economy gearing up for a revival?
On May 19, the Nikkei 225 index closed at its highest level since 1990, even briefly reaching 30,924.57 points. The last time the Nikkei exceeded 30,000 points was when the Soviet Union was dissolving. Following that, Japan's economy sank into a period of prolonged stagnation, widely recognized around the globe as the face of deflation. Even smaller nations began to critique Japan, the former world's second-largest economy, presenting themselves as superior.
Since then, Japan's stock market has been cast aside internationally, emerging as a pariah. Investors seemed to view it as an abyss; entering meant almost certain losses. Many believed it would take an eternity for the Nikkei to rise again, leaving the global investment community largely indifferent for an extended period. However, in a surprising twist, Japan’s stock market has recently surged, hitting a 33-year high driven by forces deserving of deeper analysis.
Without a doubt, Japan's economic landscape has displayed some positive signals under the helm of "Abenomics." Following the election of Fumio Kishida as Prime Minister, several beneficial economic policies were instituted. Japan, long plagued by deflation, has witnessed its Consumer Price Index (CPI) rise to 3.5%, with the GDP growth rate for 2022 reported at 1.1%, marking two consecutive years of positive growth.
Yet, despite these glimmers of improvement, a mere 1.1% growth rate cannot solely account for the stock market's unprecedented high. The essence of this surge lies not in the health of Japan's economy, but rather in the influx of capital that has propelled market performance to new heights. The reasons behind this capital movement into Japan are multifaceted.
The American economy has recently encountered its own set of challenges, two of which are particularly concerning. One is the looming debt crisis, with bipartisan negotiations still stalled as the deadline for a potential default draws near. This marks the first time in decades that the U.S. faces such a risk.
Should the U.S. default on its debt, the repercussions for the global financial market would be catastrophic. U.S. Treasuries have long been considered one of the safest financial assets. A default would necessitate a complete rewriting of traditional financial theories and a reassessment of numerous investment strategies, prompting global capital to recalibrate significantly. Additionally, a series of bank failures across the U.S. and Europe has instigated serious doubts regarding the safety of the American financial system.
These developments have incited a widespread sense of risk aversion, driving investors to seek safer assets. With even U.S. Treasuries now seen as unsafe, Japanese assets have gained increased popularity among global investors.
Japan's assets have historically been viewed internationally as safe havens, exhibiting lower volatility and supported by a robust financial system. Hence, amid rising uncertainty, an influx of capital into the Japanese stock market aligns naturally with risk-averse behavior.
Warren Buffett, the "Oracle of Omaha," has once again demonstrated his uncanny foresight. He began investing in Japanese stocks three years ago, despite the country grappling with severe pandemic impacts at that time. Berkshire Hathaway made significant investments in five of Japan's largest trading companies—Marubeni, Itochu, Mitsui & Co., Mitsubishi, and Sumitomo.
In April and November of 2020, Buffett strategically allocated $8.4 billion into these companies. After a three-year investment journey, the returns have been substantial. Recent financial reports indicate Buffett's earnings from Japan are higher than those from any other region outside the U.S. Remarkably, shares of Marubeni soared by 200%, while both Mitsui & Co. and Mitsubishi qualified for more than 100% gains. Buffett's initial investment of over $8 billion has realized at least a 150% profit margin. It's no surprise that the 92-year-old billionaire landed in Japan in April, sharing tea with the heads of these corporations, buoyed by his fortunes.
Historically, the "Buffett Effect" has influenced the investment community tremendously; many institutional investors tend to follow his lead. This effect has been pivotal in drawing an influx of capital into Japan, significantly contributing to the recent rise in the stock market.
Beyond the stock market's buoyancy, Japan's recent achievements abound. In May, Prime Minister Kishida met with global semiconductor giants, including Intel, Micron, and IBM. Observers suggest this could herald a renaissance for Japan's semiconductor sector.
Historically, Japan’s semiconductor industry flourished, especially during the 1980s and 1990s. At its peak, the country commanded a substantial share of the global semiconductor market, introducing groundbreaking products like DRAM, processors, and memory devices. Japanese DRAM production surpassed that of the combined outputs of the United States and South Korea at one point.
However, with ongoing technological advancements and evolving market demands, particularly with the ascent of nations like China, Japan's previously iconic standing began to wane. Presently, as Western nations impose restrictions on China's semiconductor sector, Japan—equipped with a solid industrial foundation—emerges as a favored player in the industry. Semiconductors represent a future-oriented sector, and should Japan capitalize on this opportunity, the potential for growth is monumental.
Nevertheless, underlying uncertainties linger regarding Japanese corporate performance and limited economic policy flexibility. As the global economy experiences a slowdown this year, Japan's ambition to ride the fast lane back to robust growth remains a formidable challenge.
Even with Japan's stock market reaching new heights, significant uncertainties continue to shadow its outlook. Approximately 66% of the funds within the market are foreign investments, a considerable fraction of which is speculative. This influx may quickly retreat in response to minor fluctuations, generating instability even as it contributes to the stock market's growth. What do you think about this precarious dynamism?
