The 2-Minute Thought: Japan Underappreciated

Japan has long served as the globe’s cautionary tale on deflation, stagnation, and the consequences of a dwindling, greying population. In the 20 years leading up to 2015 -- while the U.S. economy grew by more than 130% -- the Japanese economy grew not at all. It simply carried on quietly through its gloom with what The Economist once called “macroeconomic self-deprecation.” Perhaps as a result, the automatic tendency around the globe has been to underestimate Japan – and any hopeful signs for it.

But recent news out of Japan has been surprisingly good. There have been five quarters of economic growth – Japan’s longest run of sustained growth for more than a decade. Unemployment has fallen to a 23-year low of 2.8%. The ratio of job openings to applicants reached 1.48 – the highest since 1974. In April, there were 140,000 more full-time workers than a year ago, even as the labor force has been aging. And a record 97.6% of new university graduates had jobs as of April 1.

Anecdotally, a recent opinion piece in The Financial Times noted that, “Every shop and restaurant in Tokyo seems to have a ‘positions vacant’ sign, and many are scrapping 24-hour opening to save labour. Yamato Transport, the country’s largest logistics company, is raising prices for the first time in 27 years in a deliberate attempt to cut volumes to a level its network can handle . . . Japan is primed for inflation.”

On top of this, corporate profitability has been strong, and the Topix, or Tokyo Stock Price Index, is near  an 18-month high -- seemingly, without much interest or participation from foreign investors. 

Just about a week ago, an optimistic report from the International Monetary Fund declared that Abenomics – Prime Minister Shinzo Abe’s three-pronged economic strategy of monetary stimulus, fiscal flexibility, and structural reform – was a “success.”

Not everyone agrees with this assessment though. While some view Abenomics as quietly successful, others see it as a dreadful failure – and to be clear, no one is expecting Japan to transform into a vital, vibrant society anytime soon.

But there is one area that carries real signs of hope. That is in improved corporate governance, which is critical for attracting more investor interest to the Japanese market. More independent directors are joining Japanese boards, more cash is being returned to shareholders, and more institutional investors are disclosing their voting records at corporate annual meetings.

In 2012 only 40% of Japan’s leading companies had any independent directors, while now almost all do. A Goldman Sachs report noted that since 2012 there has been a 76% increase in dividends and shares buybacks, and since 2015, there has been a doubling of companies using equity-linked compensation for CEOS.

What’s more,  Japanese boards increasingly are looking overseas for both directors and executives as they seek to extend their presence abroad. As examples, Mitsubishi UFJ announced in May that it would appoint two non-Japanese outside directors. SoftBank plans to add 7 foreigners to its 11-member board. And Toyota has sought permission from shareholders to raise compensation caps in order to attract overseas executive talent.