The prime minister, Shinzo Abe, stood in front of the cameras in 2014 and said he was going to shake up the staid ways companies operated in Japan. It was a tall order. Shellshocked by years of economic malaise that followed the bubble of the 1980s, Japanese executives had clung to the status quo for years. Raises for employees and returns for shareholders were scarce. The consequence was an economy that barely grew.
Now, there are signs of a significant shift in how the country’s corporations are run, changes that are helping to breathe life into the economy. In recent months, Canon shareholders have demanded a diverse board of directors, Citizen Watch has said it would buy back up to a quarter of its shares, and the owner of Uniqlo has promised its workers raises of up to 40 percent. The Tokyo Stock Exchange has implored companies to be “conscious” of their share prices.
Mix in a surprisingly solid economy this year, a weak currency, ultralow interest rates — while many of the world’s biggest economies are raising them — and a plug from Warren Buffett and you have the world’s best performing major stock market.
Japan’s Nikkei 225 index has jumped nearly 30 percent this year, far outstripping the gains for the S&P 500, the benchmark in the United States. The Nikkei has not been this high since the early 1990s, when Japan was slumping into what is known as the Lost Decade.
Some observers are quick to warn that investors have been burned in the past by being overly optimistic about boardroom attitudes changing in Japan. But company profits are improving and Japan’s economy, the world’s third largest, is basking in a post-pandemic glow: Inflation has finally returned, consumer spending is rising and foreign tourists are back.
“The fundamental economic conditions in Japan, including corporate earnings, are better than in the U.S., Europe and China,” said Yuichi Murao, a top executive at Nomura Asset Management in Tokyo. “In terms of G.D.P. growth, Japan is going to outperform.”
The increase in Japan’s gross domestic product for January to March was revised sharply upward last week, to an annual rate of 2.7 percent from an initial reading of 1.6 percent. The overall picture remains mixed because the bump that came from more spending by companies was geared more to restocking the shelves and warehouses, not demand from customers. Private consumption, a gauge of how much people are spending, weakened slightly.
Still, domestic demand remains strong, Mr. Murao said. Expectations are high that it will rise further, along the lines of the so-called revenge spending other countries saw after their lockdowns ended. Japan was among the last countries to lift restrictions, and while the number of tourists is still much lower than what it was before 2020, overseas visitors are streaming in.
“They are spending much more money than before,” partly because of the weak yen, Mr. Murao said. The yen has fallen to the lowest level since the 1990s against the U.S. dollar.
Japan has also made strides against two perennial problems, with wages and inflation improving in recent months. Consumer prices, excluding fresh food, rose 3.4 percent in April, the highest level in decades. Unlike in the United States and Europe, rising inflation is more welcome in Japan because it has been mired at such low levels for so long, and the Japanese central bank has indicated it will stick with monetary easing.
But the inflation has largely been driven by post-pandemic supply shortages, said Chong Hoon Park, the head of economic research for Japan and South Korea at Standard Chartered Bank in Seoul. “It’s not driven by wage growth,” Mr. Park said, adding he expects inflation to drop next year to below the Bank of Japan’s 2 percent target.
The challenge is to sustain and broaden the increase in incomes that segments of the economy have witnessed recently. A survey by a business group found that large companies agreed to raise salaries by an average of 3.9 percent this year, the highest rate in decades.
The government is focused on raising wages and making it easier for workers to switch jobs in pursuit of higher pay. Last week, Prime Minister Fumio Kishida repeated that his economic priorities included “structural wage increases and labor market reform.”
Another leader in pushing for a change in corporate thinking is the Tokyo Stock Exchange. In March, the exchange laid out a plan that would force companies trading below their book value to increase their stock prices. Some of the easiest ways to do so is to pay bigger dividends and buy back more stock. While it’s unclear when the exchange will start implementing the policy, it’s likely that behemoths like Toyota and Honda, which has said it plans to buy back stock this year, will have to make changes. (Toyota shares are up 27 percent and Honda’s 50 percent this year.)
The Nikkei 225 index rose 1.5 percent on Wednesday to 33,502, a new high for the year.
The shift to get companies to pay more attention to profits and stock prices has been evident to Seth Fischer, a hedge fund manager who has publicly agitated for change at Japanese companies for more than a decade, perhaps most memorably by urging Nintendo to get its games on mobile phones.
“We see dramatic changes in senior executives’ behavior,” Mr. Fischer, the founder of Oasis Capital, said from Hong Kong.
One example Mr. Fischer points to is Canon, the camera and optical equipment company. Shareholders reprimanded its chairman and chief executive, nearly ousting him from the board, for a lack of gender diversity among directors. And the continuous prodding to invest more of the money they hold in reserve has led to Japanese corporations to announce a record $70 billion in buybacks in the year that ended in March, according to the Nikkei newspaper. Dividends for the current year are likely to hit another record, topping $100 billion. All of these moves combine to put money into the real economy.
Then there is the endorsement from Mr. Buffett, who said recently that he has increased his holdings in the Japanese conglomerates Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. In April, he told Nikkei that he plans to invest more in Japanese companies. Foreign investors have poured money into Japanese stocks since then, some shying away from China as geopolitical tensions rise between Beijing and Washington.
Mr. Fischer is among the bullish. And as companies take actions to improve their value, he said, they will help the overall economy of Japan by increasing incomes.
“Investors have finally gotten notice that there is a sea change opportunity in Japan,” he said.
Vivek Shankar is a senior staff editor on the International desk. Previously, he worked for Bloomberg News in San Francisco, Sydney and Washington. @vivshank
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