Photo/Hao Shuai (NBD)

Since the start of 2024, Japan’s stock market has been on a steady rise. As of February 29th, the key index, the Nikkei 225, has surged by 17.86%, surpassing the historical peak before the burst of the economic bubble, and breaking through the 39,000-point mark. For Japan, a country that has grappled with over three decades of economic stagnation, this achievement holds significant historical symbolism.

In fact, the performance of the Japanese stock market in 2023 was already remarkable. The Nikkei 225 index recorded a 28.24% annual increase, second only to the Nasdaq’s impressive 43.42% growth among major global indices. However, while the stock market has been red-hot, the real Japanese economy tells a different story.

Japan’s GDP recently experienced two consecutive quarters of decline, entering a technical recession. In 2023, its nominal GDP was surpassed by Germany, causing Japan to lose its position as the world’s third-largest economy. Simultaneously, the Bank of Japan has been signaling its intention to consider exiting the negative interest rate policy implemented since 2007, signaling a move toward monetary policy normalization.

The question now is whether Japan’s stock market “bull run” can be sustained. Will the exit from negative interest rates exert pressure on future stock market gains? How do we reconcile the divergent paths of the stock market and the real economy? To address these pressing topics of global investor interest, the Nihon Keizai Shimbun (Nikkei) interviewed Jesper Koll, an economist and advisor with nearly four decades of experience in Japan’s economy.

Since arriving in Japan in 1986, Jesper Koll has remained in the country. Over the years, he has held positions as Chief Economist at Merrill Lynch and JPMorgan in Japan. He is widely recognized as one of the most prominent “Japan experts” in economics. Notably, he was appointed by Tokyo Governor Yuriko Koike as an advisor for revitalizing Tokyo’s financial center. Currently, Koll also serves as an expert advisor at the Monex Group, a Japanese financial conglomerate.

Photo/Courtesy of Koll

On Japanese Stocks: Momemtum will accelerate；55,000 by 2025 is perfectly reasonable

NBD: The Japanese stock market has been accelerating since last year, and recently surpassed the historical high of the bubble economy era. What do you think are the reasons behind this?

Koll: It's one word. It is a corporate action that you have a new generation of Japanese, CEOs, and corporate leaders who are investing in the future. They are having record amount of business investment here in Japan. There is a record amount of mergers and acquisitions. There's a record number of management buyouts, Japanese leaders of Japanese CEOs for the first time in 30 years. They are taking action to create a better future.

The old generation was very defensive, and they were very protective. They were there very they were not risk takers. Let me give you an example. If you look at the Tokyo stock exchange, the age of the new CEOs that has been announced has fallen, right from over 65 years old to now basically 54 years old.

In the announcement of the new CEOs made over the last 18 months. And even a company like Japan Airlines, they have just promoted a new CEO, 59 years old. And it is a woman who started out as a stewardess in the company. It reflects the change of corporate culture in Japan.

If your share price, trades, below book, if you've got a lazy balance sheet, right? Just hoarding cash, just amassing cash, and we're gonna delist you. So it is exactly the private stock exchange, which is not the government. It is not the Bank of Japan, but it is the private stock exchange, putting the pressure on the CEOs to have higher economic performance, to have higher capital returns.

Everything ends and everything starts with corporate leadership. Do you have a corporate leader who wants to hoard money, who wants to just? Or do you have a corporate leader who is investing in the people is investing in better equipment, is investing in buying others? The companies, it is that animal spirit that has woken in Japan and the driver for corporate performance, because the stock market, the stock market lives and needs and depends on a brighter future.

If there is a brighter future that is created because of corporate action, then the stock market goes up. And that's exactly what is happening in Japan right now and has been happening, quite frankly, over the last 3 or 4 years.

Changes in generation leads to changes of corporation culture. One example is that an old established company, like NTT the telecommunications giant, and last year introduced performance pay. So breaking with the tradition of lifetime employment, the tradition of seniority-based pay.

NBD: We see that in recent weeks, foreign investors keep flooding into Japan's stock market. What makes Japanese stocks so attractive to them? 

Photo/TradingEconomics

Koll: The first one is that Japanese stocks are still cheap. So the value investors love Japan. The second element is that now there is growth. There is growth in corporate profits, there is growth in mergers and acquisitions, and there is growth in business investment. “Beyond value investors, growth stock investors have also joined this party. International investors from regions like the Middle East or Europe consider Japan to be a favourable investment destination.”

NBD: We also know that the Tokyo stock exchange is demanding the listed companies to reform their governance structure and improve the profit profitability. Does it has anything to do with the stock market performance? 

Koll: It's not the government, not the government, not the Bank of Japan, but the stock exchange that has issued the directives. If your share price, trades, below book, if you've got a lazy balance sheet, right? Just hoarding cash, amassing cash, and we're gonna delist you. So it is exactly the private stock exchange putting the pressure on the CEOs to have higher economic performance.

And as a result of that already over the last year, you've seen the return on equity rising from around 8 %, to now all over 10 %.

NBD: You think that the Bank of Japan's policy term on yen would not significantly affect the earnings or performance?

Koll： The Japanese stock market bottomed in 2009, right? At actually around 8,000. Today it is almost at 40,000, right? The generation of people who became a worker or who graduated from high school, right? In the year, 2010, right? Which is now basically 14 years ago, all they have ever seen is AA stock market that goes up. Right? So the people in their 20s and early 30s are very confident about it's natural for the stock market to go up, but the generation before that the people who are in their 60s and 70s, they remember the collapse of the bubble, and they are not bullish.

The old generation tends to have more money than the younger generation. On that net, you see that the individual investor is still a seller in the Japanese market, but the generation of the young generation buying, the old generation selling, that's where it gets interesting.

NBD: Do you think looking ahead this momentum in growth is going to last, because we have seen grow false, hope over the last two decades in Japan's stock market?

Koll： I think that for the stock market, and I think that the momentum will accelerate. I do think that by the end of 2025, the nikkei and climbing towards 55,000 is perfectly reasonable.

On Monetary Policy: Normalization is a positive thing, it is not tightening

NBD: We have noticed that there is a stark contrast between Japan’s economy and stock market. Japan’s GDP has declined for two consecutive quarters, falling into a technical recession. How can we make sense of this difference?

Koll: The gap between the stock market going up and the economy being stagnant will continue to widen.

The reason is very simple. Japan is old, and the average age in Japan is now 55. One in four Japanese lives on a pension. When you live on a pension, the fact that the stock market goes up does not change your income whatsoever.

As a result of that, I think that the age structure, the gap between what goes on in the stock market and what goes on in GDP or in national income or the economy, that gap will continue to widen. Because Japan is an old and ageing society, but Japan's corporate leaders are young and new generation and taking action. 

NBD: People are very looking at how the Bank of Japan is going to move in policy. Many expect that BOJ is going to end negative interest in April. Do you have any predictions?

Koll: I think that the key issue is the strength that you have in the Japanese real estate market and the growing strength in the Japanese labour market, where wages for people in their 20s and 30s are now rising at a rate of 5 or 7 %. And that's very strong. And so I think that the factors are obviously the normal ones. When you're in a hospital. There comes a time when you need to be let out of the emergency room and begin to start to walk by yourself again. And this time is now.

NBD: How will the normalization of monetary policy affect the Japanese stock market?

Koll: But the key issue is that normalization, given the strength in the domestic asset market, real estate, and the stock market, normalizing interest rates is a part is going to be a positive thing, and it is not a tightening.

Remember, in America, 2 years ago, they started to step on the brakes very aggressively by hiking interest rates on record. Time to 5%, this will not happen in Japan. So the nominal rate minus inflation in that positive or negative. So Japan has maybe 2.5 % inflation. Interest rates are zero.

Governor Wader, the Bank of Japan today does not want to destroy demand, does not want to cool down the economy. It just wants to normalize interest rates and give money, giving banks a better way to make money.

NBD: Will monetary policy normalization raise the yen and hurt the overseas profits of Japanese companies?

Koll: The yen is primarily a function of US interest rates. The yen will strengthen only when America begins to cut interest rates. Japan is a market there where the driver for performance is not the export sector. It is not Toyota, it is not the international companies. And the driver for performance is very broad-based. It is not the magnificent seven like you have seen in America where there is only the technology companies that are performing and everything else is doing poorly.

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