Japan’s stock market is back after 34 years but the country is deeply changed

In late 1989, no person better symbolised Japan’s postwar rise to economic superpower than Akio Morita, Sony’s co-founder, who stunned the world with a $3bn acquisition of Columbia Pictures.

That same year, an unauthorised English translation of an explosive essay he co-authored, titled “The Japan That Can Say No”, went viral among America’s elite. Citing what he saw as the short-termism of US businesses, Morita warned: “You may never be able to compete with us.”

It was a display of arrogance he later regretted, but it brilliantly captured the mood in Japan as its companies and billionaires dominated rankings of the world’s most valuable and richest.

On Thursday the Nikkei 225 stock index finally surpassed the level reached 34 years ago. But gone is the sense of euphoria or achievement that was prevalent in 1989, when Japanese exports of cars and televisions soared and a rise in property prices appeared unstoppable.

While the world has scrambled to bring inflation under control over the past year, Japan has yet to officially declare an exit from deflation and remains the only country with interest rates below zero. The clearest threat for the US now is the rise of China, while Japan has ceded its edge in consumer electronics and chips to rivals in South Korea and Taiwan.

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Back then, policymakers were raising taxes and interest rates to calm everything down, said Jesper Koll, a market commentator who was an economist at Warburg. “Today they are all-in pro-growth, and worried about the risk of deflation returning.”

In 1989, Japan was all-in in its bullishness. Today, domestic Japan is not even mildly optimistic.

According to a 2022 Nippon Foundation survey of 17-19-year-olds in China, India, the UK, US, South Korea and Japan, young Japanese had by far the lowest percentage (13.9 per cent) who thought the country would improve.

While Japan is now attracting global investors, “we should not enjoy it too much”, said Takeshi Niinami, chief executive of drinks group Suntory and chair of the Japan Association of Corporate Executives business lobby. “The yen is cheap and I’m afraid that investors will all of a sudden go and we’re left with an empty field.”


Economy

As the 1980s drew to a close, Tokyo was celebrating a stellar decade during which the economy had grown by an average of 4 per cent a year on the back of soaring stock and property prices.

But by the summer of 1989, Kazuo Ueda, the current Bank of Japan governor who was teaching at the University of Tokyo at the time, was already worried. “The recent rise in Japanese shares is a bubble, and it could burst any time,” he warned in a column for the Nikkei newspaper.

In May that year, the central bank began raising interest rates to head off inflation, increasing its discount rate from 2.5 per cent to 6 per cent by August 1990. As asset prices collapsed, financial institutions and property developers struggled to get rid of bad loans, triggering a banking crisis. The BoJ began to cut interest rates, and by 1999, inflation was below zero.

The Japanese economy entered a long period of stagnation during the 2000s, when the economy grew on average only 0.7 per cent. As mild deflation continued, people stopped believing that prices or wages would go up. Debt has also risen. The IMF expects Japan’s ratio of public debt to gross domestic product to reach 256 per cent in 2024, compared with 65 per cent in 1989.

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Today, the economy is at a turning point. The BoJ is preparing to begin its gradual exit from its ultra-loose monetary policy as soon as this spring. More companies are raising prices and labour shortages are contributing to higher wages.

In a speech in early February, Shinichi Uchida, the BoJ’s deputy governor, voiced optimism: “We are now facing the opportunity to break out of the mindset and behaviour of the deflationary period.”

Still, there is little sense of euphoria. The economy has contracted for two consecutive quarters, with household consumption remaining weak. “I wouldn’t call this a bubble,” said Koji Toda, a fund manager at Resona Asset Management. “And there is still no certainty of overcoming deflation.”


Business

When Nippon Steel announced its all-cash $14.9bn takeover bid for US Steel in December, bankers saw the purchase as a sign of the return of Japan’s cash-rich companies to global markets.

But if the M&A deals of the 1980s were a demonstration of Japan Inc’s ambitions to take on the world, corporate executives say today’s overseas rush is driven by the need to find new revenue outside their rapidly ageing and shrinking home market.

Following a domestic banking crisis and the bankruptcy of Lehman Brothers in 2008, Japanese groups such as Sony, Panasonic and Hitachi entered a long and painful period of restructuring.

In 1989 Japanese companies, particularly banks, dominated the global top 10 by market capitalisation. No Japanese companies make the top 10 now.

Today, Toyota has risen to become the world’s largest carmaker by sales and the most valuable company in Japan. Sony, which is now more famous for its entertainment business and PlayStation games than the Walkman portable music player, is ranked third while semiconductor equipment maker Tokyo Electron is fifth.

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In 1989, six of the world’s 10 richest people were Japanese. At the top of the list was Yoshiaki Tsutsumi, the former owner of Seibu Railway, whose wealth Forbes estimated at $15bn.

Now, only three Japanese people are ranked among the world’s top 100 billionaires, with Tadashi Yanai, founder of Uniqlo owner Fast Retailing, and his family ranked 30th with an estimated net worth of $40bn.

In terms of earnings, Japanese companies have emerged from the period of low growth with healthy balance sheets. According to finance ministry data, net profits generated by Japanese non-financial companies increased more than fourfold to ¥74tn ($493bn) from fiscal 1989 to fiscal 2022, while the amount of dividends they paid to shareholders jumped eightfold to ¥32tn during the same period.

Decades of deflation and economic stagnation, however, have also sapped the appetite for investment, leaving companies sitting on a massive cash pile of ¥343tn.

Roughly half of the companies listed in the top tier of the Tokyo bourse have undervalued stocks, with price-to-book ratios below one, prompting the head of Japan Exchange Group to launch a name-and-shame campaign to pressure businesses to deliver higher valuations.

“The current rise in shares does not necessarily reflect the actual strength of Japanese companies,” Masakazu Tokura, chair of Japan’s powerful Keidanren business federation, said at a news conference this month.


Japan and the world

In December 1989, just two weeks before the Nikkei peaked, Yasumichi Morishita spent $100mn on paintings by Vincent van Gogh, Claude Monet, Pierre-Auguste Renoir and Paul Gauguin at New York art auctions. A month earlier, property tycoon Tomonori Tsurumaki made headlines by buying Pablo Picasso’s Les Noces de Pierrette for $51mn.

In 1989, the global art market was increasingly in thrall to the power of the yen and the Japanese real estate bubble. The Japanese rush for fine art was symbolic of a country that suddenly wanted — and could afford — to buy everything. Its tourists seemed to be everywhere, and its companies also seemed to be muscling their way into every market or deal. “If you don’t want Japan to buy it, don’t sell it,” remarked Sony co-founder Akio Morita when asked about his company’s purchase of Columbia Pictures.

Akio Morita
Akio Morita © AP

By 1989, Japan had also begun to make its name as one of the world’s pre-eminent exporters of soft power, and of the idea that Japan as a country and a culture had something unique to share with the world. Hello Kitty, Mario, Gundam and Sonic enthralled, and Japan’s power to entertain became one of its best-known superpowers.

As the stock market neared its peak, Nintendo released the handheld Game Boy console — a machine that would go on to sell more than 100mn units worldwide and physically put Japanese games, a Japanese pop-culture aesthetic and Pokémon in pockets around the world. Just three days before the Nikkei peak, US audiences had their first glimpse of Akira, the seminal anime that would create a global generation of Japanese cartoon fans.

In 2024, Japan retains much of this soft power and a significant store of wealth but has lost much of its pre-eminence. China has overtaken Japan as the major economic rival of the US, the iPhone has become the device in everyone’s pocket and Middle Eastern and other sovereign wealth money is making the prestige purchases around the world.

The art bought with such eye-catching brio by Morishita and Tsurumaki in 1989 ended up in the hands of creditors — as did a great many other assets accumulated in the bubble once the bankruptcies started and Japan’s global image began to falter.


Society

On a typical night in December 1989, it was nearly impossible to get a table in any half-decent restaurant in Tokyo, recalled a then very junior sales trader. Unless, like him, you worked at Nomura Securities.

The Japanese brokerage — then the biggest securities house in the world — booked up many of the best restaurants months in advance, vying with Nikko, Daiwa, Yamaichi and other bubble-fuelled securities houses for the best places to blow inflated expense accounts.

In 1989, Japan’s corporate spending on entertainment reached almost ¥5tn, comfortably bigger than the country’s entire defence budget of ¥3.9tn that year. Nearly three-and-a-half decades of deflation and corporate belt-tightening later, Japan’s collective entertainment expenses have never recovered the peak and were ¥3.9tn in pre-Covid 2019. The defence budget in fiscal 2023, meanwhile, was ¥6.8tn.

But the sense of unstoppable wealth creation and the determination to enjoy it went well beyond the corporate tabs, as Japan moved far from its austere postwar era.

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Despite concern about population growth, this still felt, in 1989, like a young Japan. The average age in the country was 37.2, and Japan was in a boom of karaoke parlours, bowling alleys, racecourses and resort hotels. The best golf courses were charging $2.6mn for membership. People were buying high-end Shimano fishing rods, expensive high-fidelity audio equipment, home massage chairs and a dizzying array of other goods. The yen — by 1989 some 40 per cent mightier than it had been at the start of the decade — added to the sense that this was a society at the top of the global food chain.

Today, the city’s best restaurants are heavily booked but, thanks to the historic weakness of the yen, overwhelmingly by visitors.

Consumer appetites have also changed. In 1990, just one year after the peak of the stock and land-price bubble, a company, Book Off, was founded that would become the country’s largest chain of second-hand goods stores as the nation downsized and decluttered. 

Crucially though, Japan’s average age is now 48.9. This is, and feels like, an ageing society. Labour shortages are affecting almost every part of the economy, and the energy, in a country where 29 per cent of the population is aged over 65, has begun to ebb away.

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