Nikkei at centre of global stock bubble
The search for the world’s frothiest stock market is heating up. Most eyes are on the Donald Trump rally in New York. Some gaze at Narendra Modi’s Mumbai. Perhaps, though, we should be looking at Shinzo Abe’s Tokyo.
Abenomics is having a good moment. Japan is enjoying its longest run of growth in 11 years, unemployment is at 23-year lows and Prime Minister Abe’s big 22 October election win frees him to toss more stimulus at Asia’s No. 2 economy. But a 30% surge in the Nikkei 225 Stock Average over the past year? Seriously?
Tokyo shares are benefiting from the we-are-the-world stock boom. The extent to which it’s racing ahead of the 19% gain in the MSCI World index, though, raises questions.
The bullish Nikkei case rests on five factors: continued Bank of Japan liquidity, extraordinarily cash-rich balance sheets, Japan Inc. finally getting serious about return on equity, US President Trump’s potential tax cuts boosting global growth and Abe using his new mandate to accelerate structural changes.
The first is right on. Abe’s win means Bank of Japan governor Haruhiko Kuroda is sure to get a second term in April and remain a huge buyer of government bonds and stocks viz exchange-traded funds.
So is the second rationale. Corporate Japan is sitting on at least $2.7 trillion of cash, giving Nikkei stocks a comparative edge over, say, the S&P 500 index.
But justifications three, four and five are either wishful thinking or complete fantasy.
Corporate governance has indeed improved since Abe entered office in December 2012. Japan implemented a UK-style stewardship plan to inspire shareholder activism and urged corporate boards to include two outside directors. But these largely voluntary efforts lack teeth. They’ve been no match for insular practices serving up myriad scandals: Kobe Steel Ltd’s dodgy data; Nissan Motor Co.’s quality-control snafus; Takata Corp.’s deadly airbags; Toshiba Corp.’s accounting shenanigans. Japan Inc. still answers to no one.
Trump’s tax cuts, rationale No. 4, may be a long shot. There’s a reason Washington hasn’t pulled off anything like what Trump envisions since 1986.
Few topics inspire more passion, anger and trepidation than taxes. It doesn’t help that Trump is attacking on Twitter members of his Republican Party—whose votes he’ll need. And the chaos surrounding the Trump White House makes big, complicated legislative wins a tough slog.
Bottom line, the chances of Trump repeating President Ronald Reagan’s feat are worse than bulls from New York to Tokyo think.
Finally, the Abenomics reboot fantasy. You’d think that after years of majorities in both houses of Parliament, reasonably high support rates and a revival blueprint with wide public support, Abe would’ve achieved more than a few corporate governance tweaks.
Abe got the Bank of Japan to handle 90% of the policy, a dynamic that’s boosted stocks but failed to offer broader economic gains.
Real wages rose just 0.1% in August following a 1.1% drop in July. The minuscule August gain, it’s worth noting, was the first in eight months. The reason the tightest labour markets in decades and healthy corporate profits aren’t fattening paychecks is a lack of structural upgrades to cut red tape, loosen employment regulations, catalyze start-ups, empower women and relocate Japan’s innovative mojo. When global growth slows, Japan’s will stop on a dime.
The odds of Abe implementing a big bang may be even lower now. His raison d’être is amending the pacifist constitution so that Japan can field a conventional military force. The war-renouncing Article 9, added by US occupation force officials after Japan’s surrender in 1945, blocks Tokyo from sending troops abroad. It’s the life mission of right-wingers like Abe to make Japan a “normal” country again. That might be harder than Trump cutting taxes, leaving little time to retool the economy.
Sadly, Abenomics is catching. Trump has had zero legislative impact. President Xi Jinping’s recent coronation in Beijing papered over the absence of specific plans to scale back the state sector, curb shadow-banking excesses and head off a debt crisis. Instead, strongman Xi is making a contradictory push for freer markets with more Communist Party control.
In New Delhi, Prime Minister Modi is resting on his laurels as growth slows. His move to toss an unprecedented Rs2.11 trillion at struggling state-run banks treats the symptoms of India’s troubles, not the underlying problem.
But the Nikkei’s surge may be the most egregious example of investors racing ahead of economic improvements. The Abenomics stimulus explosion helps, but it won’t make corporate Japan more competitive, more inventive or more deserving the longest bull run in Japanese stocks on record. In fact, the weaker yen, a product of the Bank of Japan’s epic easing, has a dark side: reducing the urgency for companies to raise their game.
Japanese stocks aren’t necessarily heading for a crash, but the froth coursing through Tokyo bears watching. Big losses would reverberate around Asia and beyond, colliding with equity bubbles around the globe.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek.