[Insight & Opinion] Why Is Japan Trying to Boost Stock Prices?

As the bubble economy collapsed, Japan became like a graveyard for investors. The Japanese stock market either retreated or stagnated for over 30 years, and housing disappeared from the list of investment targets. The management style of Japanese companies was also considered outdated and unsuitable for the new era. Domestic companies' interest in Japanese-style management declined, and the global standard came to mean Anglo-American capitalism. If the 1980s were the era of Japan's economic victory, then from the 1990s onward it became the era of the US economy.

However, in recent years, many investors have shown renewed interest in the Japanese market. The key turning point was Warren Buffett. In August 2020, Berkshire Hathaway, the investment company chaired by Buffett, made headlines by purchasing shares in Japan's five major general trading companies. Since then, Buffett has bought additional shares of these companies and even visited Japan in person. Now, the Japanese stock market is the hottest market in the Asian region.

During the lost 30 years when investors turned their backs on Japan, there were people who never lost interest in the country. They were mainly groups interested in demographic changes. Japan was the first country in the world to enter a super-aged society. It was the first nation where one in five citizens was aged 65 or older. Now that we are following that path, these groups believe Japan's experience with aging serves as a living anthropology textbook.

With deflation and aging combining, Japan's enormous household financial assets mostly remained dormant in deposits. From an individual's perspective, this may be a rational choice because falling prices increased the value of cash. Aging is also related. Since the elderly hold more than 60% of household financial assets, they manage assets with a focus on safety, which has reduced the vitality of the capital market.

The stagnation of the stock market does not simply mean a decline in stock prices. Young entrepreneurs with grand ambitions need to be rewarded through stock market listings. Investors also find it difficult to recover their investments if companies do not go public. Stock market stagnation negatively affects the formation of the corporate ecosystem from startup to listing. This is why stock market stagnation reduces vitality across the economy and society as a whole.

Prime Minister Fumio Kishida has introduced a policy to "double asset income." If more than 2,000 trillion yen flows into investments and assets double, the economic impact would be enormous. Previous governments also made efforts to improve governance, introducing the "Stewardship Code" in 2014 and the "Corporate Governance Code" in 2015. Efforts to improve governance have been ongoing for a long time. The Bank of Japan is the second-largest shareholder in the Japanese stock market after the Japan Pension Service. The central bank has implemented an unprecedented policy of direct purchases. This time, the Tokyo Stock Exchange sent an official letter to 3,300 companies listed on the Tokyo Stock Exchange, requesting that companies with a price-to-book ratio (PBR) below 1 disclose and implement specific measures to raise their stock price levels. This is a strong signal to resolve stock undervaluation and increase household asset returns.

There are various ways to prepare for aging. Welfare is necessary, education is necessary, and jobs are necessary. Among many alternatives, what is underestimated is restoring the ferocity of the capital market. It is time to consider why Japan, which had to endure a long tunnel of pain due to aging and deflation, has introduced such extreme policies to revive the capital market.

Lee Sang-geon, Head of Mirae Asset Investment and Pension Center