The PS5 is out for pre-order, the great hope of Japan Shinzo Abe has stepped aside, and central banks the world over are ‘going Japanese’.
There has never been a better time for investors to look at Japan.
It’s the third largest economy in the world, has outperformed all major stock markets outside the US since 2012, and has, in my view, been too easily dismissed by investors.
But firstly, a quick question.
Are you invested/considering investing in Japanese companies?
Let me know why at [email protected]!
When I started reading Bending Adversity, by David Pilling a few weeks ago, I wasn’t at all thinking about reviewing it for you all. It’s just a book about Japan after all, not investment.
But the more of it I read, the more I realised that understanding Japan’s history and economics is a vital part of the investment case. Because in general, I think most people have got It wrong about Japan.
It’s very well written, a pleasure to read for anyone interested in Japan, or more broadly in economics, history, capitalism, or the functioning of societies. Japan, for 250 years sealed off from the rest of the world, operates on very different values and assumptions, which is what makes it so fascinating to visit and learn about.
From an investment perspective, it has been blindly and almost uniformly ignored, by those who couldn’t forget the extraordinary crash of 1990, when land and financial asset prices fell more than in America during the Great Depression of 1929.
Two things stand out here.
Firstly, the way investors are once burned twice shy. I’ve written about how it took a full investment cycle of bull market and crash between 2002-2009 before the investors could start piling into the Nasdaq again. Too many people had lost too much money when the tech bubble burst, and they just couldn’t bear to go back in, so tech underperformed for a decade afterward. It was the same in Japan, among both domestic and international investors.
So don’t go thinking you can just buy the dips in US tech stocks forever.
Secondly what stands out to Pilling (and I agree) is the simple fact that Japan, during the 90s and decades since, experienced nothing like a Great Depression.
Instead they are described as the ‘lost decades’, but unemployment, poverty and suicide rates never got near ‘depression’ levels. Japan has not had rioting, food shortages, destitution or widespread homelessness.
One story Pilling tells about an American economist sums up the difference between steadiness and disaster nicely.
In the early 2000s, the noted economist Paul Krugman repeatedly blasted Japan’s central bank for weak leadership and a lack of imagination in dealing with low growth and deflation. Pilling very delightfully notes that Krugman admitted, in the years after a financial crisis struck the US and Europe, that he might have been too harsh on Japan, and that it might be seen as ‘a model of how to weather an economic storm’.
Because in fact, post-bubble Japan has been remarkably… stable.
Its debt-to-GDP ratio is enormous, well above 200%. But surely after a massive crash is absolutely the time to be going to extreme lengths to protect the people living and working in your society. The high debt, while risky, can be considered the price of stable, high employment figures, a broad middle class, low poverty rates – essentially, the avoidance of a great depression. A price worth paying, you could say…
It has some problems – growth, in(/de)flation and demographics, but many of these have been overstated, especially recently.
Weak growth is not nearly as much of a problem as people think. You just need to look at per capita statistics to see why…
In fact, my first ever article for Southbank Research focused on using per capita statistics when looking at international energy usage, because China goes from the top polluter to something like 70th. Per person emissions are a much better measure of national contributions to climate change, and America is top of the big countries by far.
In Japan, per capita statistics are equally important, because the population has been gently falling for the last couple of decades.
Pilling notes that in nominal terms, Japan’s economy has gone nowhere in 20 years (he was writing in 2012), while the UK and US had grown 152% and 160% respectively. Much of that though, is down to rising prices and populations. Adjusted for both, Japan has grown 27%, the US 37%, and the UK 44%.
In the early 2000s, Japan underwent a mini-boom, and its longest economic expansion since the war under vibrant leader Junichiro Koizumi (‘The samurai with a quiff’). And it turns out the 1990s weren’t all that bad compared to other Western nations.
In fact, on a purely per capita basis, income per person in Japan grew at an annual rate of 0.9% since 2002, while the US and UK only managed 0.8% and 0.7% respectively. Norway’s decade saw only 0.5% income growth per capita.
Japan’s unemployment never rose above 5.5% even after the financial crisis in 2008, and by 2012 was at 4.1%. At the same point, the US’ rate was 8.1%, France’s was 10% and Spain’s a massive 24.1%.
Japan is an employment economy, so this makes sense. Jobs are often for life, and many jobs seem pointless. From my time there I mainly remember the fluorescent road workers with brightly lit wands waving traffic about, as if the signs and road markings weren’t enough.
I also remember sitting on a mostly empty subway train in Tokyo, watching an immaculately dressed conductor stand over the shoulder of an immaculately dressed young driver, with a clipboard and paper, recording the arrival and departure times to the second with a short pencil.
In the UK we would call that nothing short of a waste of money, but Tokyo’s subway service is the most efficient in the world. If a train leaves more than 30 seconds early or late it makes the morning papers.
Which is more important, full employment and brilliant public service, or economic ‘efficiency’, aka cost-cutting for ‘profit’.
This leads me onto an incredibly interesting discussion which Pilling works through very well.
It’s about the very nature of the societies we live in.
Is the current form of capitalism the very best one?
You don’t have to be ‘on the red team’ to see that some things are going terribly. I’ve written before about the economic troubles being delivered by unelected central bankers, creating debts and slowing growth. Ben Hunt of Epsilon Theory is almost certainly the best voice on this topic – the sickness of western capitalism. Buybacks, fraud, insider dealing, political collusion, a weakening media, loss of trust, divisive politics.
Japan offers what can be called ‘stakeholder’ capitalism, as a pose to the shareholder capitalism and individualism of America and the West.
While many western commentators criticise Japan for deflation, low growth and corporate inefficiency, essentially what they are annoyed about is that most of corporate Japan believes that the purpose of companies is to benefit their employees.
They don’t just buy back shares to line their own pockets. They hardly ever fire people either.
What they do is they offer job security, and they save money as cash in case a financial crisis comes along, or a global pandemic. The fools…
That’s why listed Japanese companies came in to the March crash with more cash on their balance sheets as a percentage of revenues than in any other developed nation. Making their companies very interesting prospects for investors right now, I would say, because bankruptcy risk is so much lower.
Some growth is sacrificed for that security, but who says that our Western model of capitalism is the right one? Is growth at all costs really the best way to live our collective lives?
With what’s happening at Tesla, the Fed, and in American politics, and with the Financial Crisis still firmly in my memory, I have been hoping to spend more time thinking about the nature of capitalism.
I read a great book on the subject a few years back, Capitalism 4.0 by Anatol Kaletsky, co-founder of the brilliant Evergreen Gavekal which provides brilliant articles every Friday.
But reading Pilling framed the subject so well for me, and I found myself very attracted to the Japanese model.
Suddenly, it’s not all about growth at all costs, a wild-west of capitalism and lax regulations, free trade and happy-go-lucky HR policies.
Hazel Henderson, a guest on our recent Beyond Oil series, also spoke brilliantly about her work on getting governments to include more and more non-economic data in their national metrics, pointing to the complete inadequacy of GDP, which no citizen cares about in the slightest.
Things like schooling, healthcare, and our local and natural environment should all factor much more significantly in how we think about success and progress, she argues, and I’d wager she would get a good reception in Japan.
What I really like about Pilling’s description of Capitalism with Japanese characteristics, and Hazel’s work on expanding on GDP, is the way in which it’s possible to oppose certain traits of democratic capitalism as it currently exists, without pivoting to entirely different systems of rule – like the Chinese model.
It leads to profound and under-discussed questions about what our societies value most, and whether we shouldn’t give Japan’s model more credit that we do.
Anyway, before I go on too long, a few final points and notes from the book which I really enjoyed, and heartily recommend:
- Japan sits in a very interesting space as an Asian country which has long sought to be considered as part of the ‘Western Developed’ bracket. Part of its WW2 rage was based on the realisatio n that ‘White Western’ was a more accurate description, formed when its request for racial equality to be a part of the League of Nations’ constitution after WW1 was rejected.
Still, with the emerging Cold War II narrative between US-China, so brilliantly documented by our own Boaz Shoshan over at Capital & Conflict, Japan’s role as an Asian nation under American influence will only become more significant.
- In the late 1980s as the bubble neared its peak, Nui Onoue and her large pet ceramic toad began making predictions about the stock market from an exclusive restaurant in Osaka. Nui’s toad, fortuitously you could say, was the recipient of stock tips from the gods, or so the story went.
The thing is, it looked like it might be true, because its tips proved so successful that by the time the bubble burst, the toad’s portfolio had $20 billion under management, including money from Bank of Japan officials and large investment firms! She was jailed after trying to keep the scheme alive after prices crashed, and it turned out the tipster wasn’t a god, but a senior exec from a bank.
- Companies, famed for their group stretching exercises in the morning, used to go one better and have their own songs, such with the lifelong loyalty to and from their staff. One went:
“We will send our products to the people of the world
Our hard work and toil like the sound of water
Gushing from the spring, industrial progress, industrial progress
Number one for harmony, Matsushima Electric”
I’d like to finish with a quote from, somewhat unoriginally, my favourite author, Haruki Murakami. It relates to the discussion on the nature of capitalism that we touched on before.
Pilling writes of the ‘empty affluence’ of Japan in bubble period. Large companies profited over small, businesses were allowed to pollute the environment in the name of profit, to charge domestic customers more than foreigners in the name of the balance of trade, and households suffered meagre interest rates on their savings so that the government could lend to businesses cheaply.
Murakami says, “I think the bursting of the bubble was good for Japan… When we were rich, I hated this country. It was stupid, foolish and arrogant. We were so confident about our system. The bubble burst and we have problems these days. But I think it’s good. I think our society is healthier now. Back then, we thought we were right. But now we are kind of cool and we are thinking, What am I? What are we? I think that’s good. It happens in history. I think it is only a matter of time before we recover, economically and mentally.”
I hope you all have a wonderful weekend, and as always let me know your thoughts at [email protected]
Editor, UK Uncensored
Warren Buffett has recently ‘bet against America’, by investing in a certain type of Japanese company. It could be an early sign of what investors can expect to deliver the best returns over the coming decade or two, in my opinion. You can read more here.