For years, many things seemingly stood still in Japan. My last visit pre-Covid was in late 2019, and the airport limousine from Narita Airport to downtown Tokyo was priced at JPY3,000 — unchanged from what I recalled paying during my first trip back in 1997.
The same ticket now costs JPY3,200. Although the 1997 price was a princely equivalent of $50 then, it is now a manageable $31, thanks to gain of the Singapore dollar vs the yen. In purchasing power terms, the same ticket is probably the equivalent of $15 back in 1997.
Nominal prices may have stagnated in Japan for the larger part of the past few decades. But, to deem Japan uneventful is a severe understatement. The post-war boom sent real estate prices spiralling. Mortgages became intergenerational, as parents committed their offspring to very, very long-term loans — a phenomenon made even more tragic when the bubble burst in the 1980s and decades of economic underperformance ensued.
Seiko Matsuda and her fellow pop idols of the 80s and 90s have been replaced by wellgroomed, clinically-manufactured K-pop stars. Docomo, which launched the world’s first mobile Internet-services platform in 1999, used to occupy prime retail and branding spots at the trendy Harajuku area. It has since been displaced by Apple and Samsung.
Sony Walkmans, Toshiba notebook computers and Hitachi white goods which innovated and dominated in the past now rank behind LG and Philips. Toyota is still competitive, but lags behind the Americans, Chinese and Europeans in electric vehicles (EVs). At least in another major industry, fashion, Japan still has Fast Retailing, better known as Uniqlo, deftly holding its own versus Inditex (which owns Zara and so on) and China-founded, Singapore-headquartered Shein.
Up till 2021, SoftBank’s Masayoshi Son, riding on his phenomenal success investing in Alibaba Group Holding early on, could seemingly do no wrong. In recent years, its flagship Vision Fund has been battered by the toxic cocktail of tougher operating environment, geopolitics, higher interest rates, murkier paths to profitability and hot air valuations, which took down the value of its listed and unlisted investments from WeWork, Uber, Didi and Grab.
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In the first Chew On This column this year, it was suggested that Japan could be the “dark horse” of 2023, as it benefits from the reopening, better competitiveness from a weaker yen, and tourism revival. Or, simply because as a stock market, it has been long forgotten by global investors and therefore the only way is up.
Blade Runner
My visit to Japan coincided with the G7 summit in Hiroshima. This cosy gathering of ageing economies (their combined economic output is but just 30% of the world’s total) was joined by Ukraine’s President Zelensky along with eight others including Australia and India. The summit participants made expected pronouncements that they need to “de-risk” China while promising to send Ukraine some F16s.
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US President Joe Biden’s fleeting appearance at the summit too was expected, as he made use of the airtime to declare that the US will never default on its debt. The next moment, he flew back urgently. On board the Air Force One, Biden continued his argument with Speaker Kevin McCarthy on the debt ceiling. Political brinkmanship makes headlines, but market decision makers await actions, not words.
Having said that, while I was in Japan, the Nikkei 225 index, already up 19.8% year to date, hit an auspicious 30,808-point level on May 19. Or, to extend the parable, Japan’s key market index is now at a 32-year-high.
If only I had followed my own advice in January and started buying, instead of waiting for an issuer to list a Singapore-listed Japan ETF. On May 20, Bloomberg ran the story, “A US$518 billion rally shows Japan stocks are all the rage in 2023”, listing how big names ranging from Warren Buffet to Man GLG to JP Morgan are in and seeing further upside.
I would like to think that they read The Edge Singapore five months back, but I am sure all the numbers have been properly crunched and therefore built on sturdier ground than my musings.
Part of the consensus thesis, it seems, is relative. There’s recession in the US, and China’s recovery is sputtering. My broad call that Japan is the dark horse this year, along with the defensive carry in Singapore, has borne out for five months so far, but will it continue?
Shinjuku, the iconic business and shopping area, was the set for the 1982 movie Blade Runner and inspiration for its sequel Blade Runner 2049. Revisiting this neon-lit part of Tokyo, I learnt a few things. Like in Singapore, corporate Japan has used the pandemic to restructure, clean up balance sheets, and even turfed out one high-profile CEO in the form of Nissan’s Carlos Ghosn. Meanwhile, newer, and more competitive businesses have emerged to challenge traditional giant zaibatsu (conglomerates) the likes of Mitsubishi, Mitsui and Sumitomo.
Pandemic restrictions have yet to be fully removed but there appears to be a healthy turnover of shop fronts, a steady pace of new construction and regeneration from Shimbashi, around Marunouchi to Harajuku. In contrast, South Korea and Hong Kong, at this similar stage of Covid reopening, seemed muted when I was there in the last six months. Consumer spending is increasing in Japan alongside some long overdue nominal wage inflation of 3.4%. With interest rates finally ticking up a tad and a very mildly positive yield curve, local corporations are starting to invest as growth expectations are unshackled by a more flexible labour market.
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Foreigners from their perch at the top of Park Hyatt Tokyo are enjoying a cheaper yen and facing fewer “language translation” issues. As such, they find it easier to allocate capital into markets, or navigate around town to shop for either real estate or businesses.
Sony’s 7.3% rise on May 20, on the announcement that it plans to spin off its financial services arm, is a good example of corporate transformation and the growing level of investors’ interest, both local and foreign. Even current Prime Minister Fumio Kishida’s popularity rating is rising along with the market, especially since Japan, having fallen behind for years, now has a chance to play a critical node in chips as its “friend-shores” for its Western allies.
Confidence can be infectious and self-fulfilling. I would now like to buy market dips, although that may prove elusive. The one caveat, however, is that Japan, with its political interest tied to the US, and its economic destiny to China, is antithetical, and therefore hard to reconcile off a thin blade.
Shinjuku Incident
The late Shinzo Abe’s first premiership was fraught with great challenges. When he visited Hu Jintao in 2006, China was about to overtake Japan as the world’s second-largest economy. The period marked significant competitive political and economic issues between the two; Japanese businesses were targeted by China on the mainland, while arguments over Senkaku Islands (known as Diaoyu Islands in China) were sore and recurring. It was stressful to the point of Abe stepping down.
By 2010, China’s GDP had pulled ahead. In an acknowledgment of China’s economic strength, Japan relented and opened up to China for trade, investment and tourism. Abe’s second visit in 2018, when he met Chinese President Xi Jinping, was on friendlier terms, as there were no more economic wars to fight. Globally, this dynamic is playing out with the US who is relentless in rallying its allies to contain China — as the fight is now for first place.
The Chinese who had emigrated (mostly illegally) to Japan in the 90s adopted local identities and customs. They slogged in ramen shops and pachinko parlours, and/or were used as cheap-for-hire hands by the yakuza, as portrayed by Jackie Chan in the 2009 movie Shinjuku Incident. No more. That role today appears filled by illegal Vietnamese immigrants instead.
The Chinese today are seen and heard in the shopping districts, as they buy up all the limited-edition luxury goods, after which they fill up the limited seats in top-rated restaurants — or so Singaporeans lamented to me. Anecdotally, during the pandemic, wealthy Chinese from mainland and Hong Kong descended not only to Singapore, but also Japan, as they snapped up offices, apartments, and even ski resorts and ryokans.
My driver (arranged through Booking.com) — called Sai — turned out to be a Chinese who has worked in Fukuoka for 10 years. He had returned to China once but found himself back in Tokyo as he found it hard to survive in his trade (running bars) in China amid the pandemic. For the past two years, Sai has been ferrying Chinese lao ban (bosses) around town as they check out which choice properties to buy. In Ginza, a salesperson who appeared Japanese had arrived from China years ago, and has totally assimilated by now. She spoke very softly in Mandarin to communicate with us — almost embarrassed to do so, in an exceedingly polite, Japanese-like manner.
Over dinner in Nezu, an old colleague highlighted the paradox. China is Japan’s largest trading partner, and growing. The Chinese are providing capital for business and revitalising real estate. Chinese online brokers are getting licences onshore and may soon provide competition for the Japanese e-commerce broking giants. Political alignment to the US could enable some extra economic uplift with increased military spending as the “no war” Article 9 of the Japanese constitution continues to be reinterpreted more loosely. But Japan is at a crossroads: economic growth or its defence umbrella — can it manage both?
The Last Samurai
Throughout my trip, I noticed many Chinese restaurants. It’s not that I don’t like Chinese food but I am quite sure I can savour better fare elsewhere. Amid this onslaught, almost akin to the mala invasion of Singapore malls and coffeeshops, I am hopeful that the sushi and ramen in the fine tradition of Tampopo and Jiro Dreams of Sushi can be sustained and prosper. I have similar hopes for the unique Japanese communitarian society of low crime and cleanliness (without needing fines), and that newcomers will come and respect this culture.
I leave Tokyo optimistic, but with another puzzle to be explored next: How could it be that the securities industry and its participants from the last three decades are no longer recognisable or exist? And yet, the Nikkei is at a 32-year high? And more importantly, does this dark horse still have strong legs?
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
