[2024 Financial Forum] Park Sang-jun: "The Secret to Japan's Stock Market Revival is Corporate Innovation... SME Reinvestment is a Challenge"

2024 Asia Financial Forum

Professor Sangjun Park of Waseda University is attending the '2024 Asia Financial Forum' held at the Chosun Hotel in Jung-gu, Seoul on the 9th, giving a lecture on the topic 'The Japanese Economy Seen from the Field.' Photo by Jinhyung Kang aymsdream@

Professor Park Sang-jun of Waseda University in Japan recently commented on the background of the recent boom in the Japanese stock market, stating, "Japanese companies have faced crises and started strengthening their market competitiveness to 'survive,' and a culture that emphasizes operating profit margins has begun to take root." He added, "Strengthening research and development (R&D) and the resulting new challenges undertaken by companies are also important factors."

On the morning of the 9th, at the 2024 Asia Financial Forum hosted by Asia Economy held at the Westin Chosun Seoul in Jung-gu, Seoul, Professor Park delivered a presentation in the session titled 'The Japanese Economy Seen from the Field.' He said, "Government stock market stimulus measures, continuous quantitative easing by the central bank, and the inflow of foreign investment funds from China may also be part of the background, but fundamentally, stock prices cannot rise if corporate earnings are not good."

He first noted that the recent Japanese economy has shown a trend of escaping deflation by continuously achieving the inflation (price increase) target of 2%. According to Japan's Ministry of Internal Affairs and Communications, the inflation rates for 2022 and 2023 were 2.3% and 3.1%, respectively, exceeding the target for two consecutive years. The Bank of Japan (BOJ) also forecasts that the inflation rate will be 2.8% this year and around 1.9% in 2025?2026, close to the 2% target.

Professor Park then pointed to the structural changes and innovations in Japanese companies as the background for the recent stock price rise. After a period of crisis during which companies that led 20th-century Japanese industries such as Toshiba, Sanyo, and Sharp were delisted or sold off one after another, the surviving companies began to improve operating profit margins, that is, to strengthen competitiveness for future survival.

He explained, "In the case of Sony, a Japanese electronics company, when former CEO Hirai Kazuo took office, he set goals of 'profitable restructuring' and 'solid internal management,' and indeed succeeded in improving operating profit margins." He added, "Overall, operating profit margins of Japanese companies are on the rise, and investors are increasingly emphasizing operating profit margins."

Professor Park analyzed that the divergent stock price trends of Ajinomoto (food) and Seven & I Holdings (distribution), two representative Japanese companies, also follow this pattern. Both companies recorded record-high operating profits last year, but Ajinomoto, which improved its operating profit margin, saw a significant stock price increase, whereas Seven & I Holdings, which did not, failed to see its stock price rise.

He said, "Ajinomoto has been proactive in overseas expansion and has diversified its business to the extent that it holds a 95% global market share in some semiconductor materials, while Seven & I Holdings, focused on distribution, faces Japan's aging society trend, and even investors lack confidence in the company's future." He added, "Our government should encourage overseas expansion rather than demanding reshoring from companies to help them survive."

Strengthening corporate R&D and entering new businesses were also cited as major reasons. Looking at the R&D ratio relative to sales by country, Korea is at 3.7% and Japan at 4.0%, showing little difference. However, Professor Park pointed out that in Korea, excluding the government and Samsung Group, the ratio remains at 2.4%, indicating a significant illusion effect.

He stated, "Looking at Japanese companies, as in the earlier Ajinomoto (semiconductor) example, Sony is actively challenging new fields such as mobility and artificial satellites, Honda is working on light jet aircraft, and Toyota is developing lunar rovers." He added, "In areas where Japan lags, such as artificial intelligence (AI), companies boldly adopt overseas technologies and actively engage in strategic alliances regardless of domestic or international boundaries, such as Sony-Microsoft and Sony-Honda partnerships."

However, Professor Park believes that to completely overcome Japan's 'lost 20 years' and deflation, issues such as the rapidly increasing national debt and stagnant real wages of Japanese workers must be resolved. He explained, "Currently, Japan spends 8.6% of its fiscal budget, about 9.7 trillion yen (approximately 85 trillion won), just to repay government debt, but tax revenues alone are insufficient, so 31.5% of the budget is financed through new bond issuance." He added, "Over the past decade, during the second round of quantitative easing, the BOJ kept 10-year government bond yields close to 0%, but now they have risen to about 0.8%, increasing the burden."

Professor Park also viewed real wage growth as a key issue. Although nominal wages are rising due to government demands for wage increases, real wages have continued to decline. According to Japan's Ministry of Health, Labour and Welfare, Japan's real wage growth rate last year was -2.5%, marking 24 consecutive months of decline.

He said, "Large companies, centered around Keidanren (Japan Business Federation), are benefiting from yen depreciation and are considering a 5.8% wage increase this year, exceeding the inflation rate, but small and medium-sized enterprises, which account for most employment, are either suffering losses or gaining minimal benefits." He concluded, "Ultimately, it is necessary for large companies to share a certain level of profits with small and medium-sized enterprises, but the reality is somewhat negative in this regard."