Is Japan back? That is the wrong question

High expectations of a return to the 1980s hype cloud the real, changing Japan

By Gearoid Reidy
/ Bloomberg Opinion

Three of the most famously ill-fated words in investing are “Japan is back.”

That was the phrase used by the late then-Japanese prime minister Shinzo Abe, who hailed the country’s return in 2013 during the international community’s brief flirtation with his Abenomics program. A decade earlier, during the premiership of the lion-maned then-Japanese prime minister Junichiro Koizumi, Newsweek headlined an article with the same language — which even back then was so cliche that the publication saw fit to append: “No, Really!”

Both moments flamed out, with interest fading when overnight solutions to Japan’s problems failed to materialize. They were only the most notable of many such false dawns that have appeared ever since the economic bubble burst at the peak of the 1980s hype that Japan would soon dominate global trade.

Illustration: Yusha

So despite the post-pandemic return of foreign money to Tokyo, it is understandable that few are comfortable declaring this a definitive resurgence, no matter how enthusiastic the likes of Warren Buffett might be. He has made a multibillion-dollar bet on the country’s trading houses — giant conglomerates including Mitsubishi Corp and Mitsui & Co. However, investors should understand that regardless of whether Japan is back, it has changed. Those who briefly rode the waves of interest in 2013 or 2003 before seeking easier profits elsewhere would find a radically different country, one that has cast off almost every major feature of the long period of economic stagnation known as the Lost Decades.

That was an era running from the early 1990s, characterized by anemic growth, chronic deflation and elite dysfunction. Leaders attempting to recapture old glories instead merely kept the country anchored to the past. Now, long-stagnant stocks and property prices have finally broken their three-decade highs. Once-protectionist Tokyo might now be the world’s most exciting place to make deals. For investors pivoting away from China, Japan is starting to look a lot more attractive.

A recent moment sums up how the Lost Decades are over. In July, SBI Shinsei Bank Ltd repaid the last of the public funds used to keep it from going under during the 1998 financial crisis. It was the final bank that the government bailed out to do so, drawing a line under an episode which saw multiple financial institutions dither and then collapse as the value of the inflated assets on their books crumbled.

These days, Japan’s banks are posting record profits. They have been aided by significant shifts in the domestic economy. The Bank of Japan (BOJ) has drawn down its massive stimulus program and is slowly normalizing policy. Although interest rates remain low, with the BOJ’s main rate set at only 0.5 percent, that is still the highest level in almost 20 years.

After years of trying to kick falling prices, deflation has been conquered. It might have taken the external shock of the post-pandemic worldwide inflation surge, but almost three decades after prices first fell into negative territory, they have now risen every month for the past four years.

Companies, now able to charge customers more for the first time in years, and also faced with an increasingly acute labor shortage, are lifting long-stagnant wages. It is not yet enough to overcome inflation, but workers’ pay is rising by the most since the economic heyday. The minimum wage this year is to surpass the psychologically important barrier of ￥1,000 (US$6.80) an hour in every prefecture, and the mindset of persistent cost-cutting as the solution to the country’s problems is on the outs.

That is not to suggest that the nation has fixed every problem it has grappled with. Indeed, prices are a good place to start. Japan might be unique in having spent years encouraging inflation, but the public is no more content about the rising cost of living than are people elsewhere. That discontent has helped lead to the return of the political dysfunction that was common in the down years. After successive election drubbings, an internal revolt within the ruling Liberal Democratic Party (LDP) led Japanese Prime Minister Shigeru Ishiba to announce his resignation last month. A party leadership election was held on Saturday. His replacement, the conservative Abe protege Sanae Takaichi, has adopted as her slogan the familiar refrain: “Japan is back.”

Political gridlock and the revolving door of leaders forced out of office were features of the Lost Decades. Ironically, the current political weakness is a sign for investors that this Japan moment might be longer-lasting. The booms of the Koizumi and Abe eras were based on hopes for reform, pegged to charismatic leaders who Westerners could understand. When change did not materialize immediately, they took their money elsewhere. By contrast, the recent surge does not have a single author; neither Ishiba nor his predecessor, former Japanese prime minister Fumio Kishida, can claim credit for it, with both men focused more on international relations than markets.

Some might be spooked by the rise of the right-wing Sanseito party, a fringe group with MAGA-like “Japanese First” slogans that had a surprising performance in July’s upper house elections. Still, it holds only 15 of 248 seats in the largely powerless upper house, with far fewer in the lower house. It is true that other nations have underestimated nascent populist movements, but a shift to a protest vote is common in Japanese elections when discontent grows with the dominant LDP. These movements, from the Japan Restoration Party a decade ago to the Democratic Party for the People last year, are rarely staying forces, as the public gets to know their policies (or lack thereof).

Nonetheless, Sanseito’s appearance provides an opportunity to debate what is one of the country’s most visible changes. That Newsweek article from 2003 glibly declared that Japan “handles immigration badly.” However, things look very different now: The de facto mass immigration policies of many Western nations is leading to public revolt, and Tokyo has been watching these mistakes as it in turn increases its foreign workers.

This change has been building since the mid-2010s, when Abe made a push to boost labor from overseas. The population born outside the country more than tripled during the Lost Decades, with more than a million overseas workers added since 2015. Foreign staff are now found from convenience stores to boardrooms. However, there was little open discussion over the policy. With citizens unused to living in such proximity to outsiders, overseas labor is understandably creating political growing pains. Combined with the day-to-day annoyances of foreign tourists, it is no wonder that this policy is a topic of debate.

However, Sanseito’s rhetoric, largely cribbed from social media overseas, would find little lasting purchase in a country that does not have enough workers to support its aging residents. Crimes by foreigners, including visa overstayers, have plummeted. Although the native population shrank by almost 1 million last year alone, newcomers still account for only 3 percent of the total. There is little concern they are stealing natives’ jobs.

The property market is also surging in major cities, which are still growing as people move from the countryside. Speculative real estate trades were a chief cause of the bubble bursting in the 1980s, and recovery came so slowly that Tokyo’s stagnant property valuations were once the punchline of jokes. Over the past year, residential and commercial values alike have surged to record highs, thanks in large part to a flood of foreign money. This feels very different from the speculative accumulation of the past; Tokyo remains incredibly good value compared with its global peers.

Overseas investors in the 2000s looking to buy distressed assets were often dismissed as “vultures” feeding on the carrion of the Lost Decades. Their attempts were largely thwarted as boardrooms closed ranks and the state stepped in to block takeovers. Things could not be more different now. Indeed, Japan might be the most exciting takeover market in the world. Some of the country’s most iconic companies have been targeted for takeovers, a shift made possible by a corporate governance code that encouraged executives to focus on shareholders. Activists are everywhere, and no boardroom, large or small, can feel safe.

The US$46 billion sale of Seven & i Holdings Co to Canada’s Alimentation Couche-Tard Inc did not go through, but it was a flawed deal. The more instructional example is Seven & i’s sale of the storied department store brand Sogo & Seibu Co. The chain was once such a cherished national asset that in the 2000s, it brought down a prime minister and stopped the BOJ from raising rates. In 2023 no one batted an eye when Fortress Investment Group snapped it up, with the Seven board yielding to pressure placed by an activist investor.

Together with the vote of confidence from Buffett, who has amassed stakes of about 10 percent in the country’s five largest trading houses, it is a signal. Private equity funds have joined Buffett, seeing vast potential for deals. Stocks are responding, surging to finally surpass the peak set on the last trading day of the 1980s.

What the nation’s companies make is shifting too. The economy was once known for building tape decks and television sets, but these days it is increasingly selling something different: Japan itself.

The first form this self-promotion takes is tourism. The country now gets more visitors in a month than it did in a year in the 2000s. For all the complaints of overtourism and bad behavior, the flood of foreigners is also leading to about US$55 billion in spending. The country has a target of 60 million travelers a year by the end of the decade, which would make it one of the world’s top five destinations.

This development feeds into the second form: Greater familiarity with Japan has boosted the popularity of its content, in the form of anime, manga and games. From 2015 to 2022, overseas sales of such content tripled. Netflix Inc reports that one out of every two users of its platform watches Japanese animation. From the world’s fastest man, Noah Lyles, who whips out Yu-Gi-Oh cards before his races, to the viral cosplay of performers such as Megan Thee Stallion dressing up as their favorite anime characters, it is already everywhere. The government and the country’s largest business lobby aim to quadruple that reach, targeting annual content sales of US$135 billion by the early 2030s. Together with a goal of US$102 billion in tourist spending, the sectors combined would dwarf even the auto industry in their importance to the economy.

Japanese consumer brands are less visible than they used to be. At events such as the World Cup, signs that once advertised the likes of Panasonic Holdings Corp instead pitch Chinese brands such as Hisense (海信). However, this shift does not mean these companies are dead. Instead, they have moved up the value chain into specialized, hard-to-make materials and products. Panasonic now produces high-density batteries for Tesla Inc. Hitachi Ltd is reported to be putting its refrigerator and washing machine division up for sale to concentrate on its surging Lumada digital solutions segment. Its stock has never been higher.

The world’s semiconductor industry is dependent on Japan’s supply chain of wafers, chemicals and precision equipment, with the country making two audacious bets on restoring its dominance of the sector. The country invited Taiwan Semiconductor Manufacturing Co (台積電) to build a series of fabs in the southern island of Kyushu and backed a US$33 billion bet on Rapidus Corp, in northern Hokkaido, with the hope that it can produce its own bleeding-edge 2-nanometer chips.

Japan, of course, faces many problems. The population is shrinking even faster than expected. The associated costs of the aging population would further swell the government’s considerable debt. The bright spots in the economy are large, but concentrated in its city centers. For many rural areas, there is no return. That bifurcation of the economy, exacerbated by the labor crunch, risks one of the Lost Decades’ big success stories: the impressive social cohesion and lack of inequality. All that is before even considering the risk of natural disaster and external threats, from China’s aggression to US President Donald Trump’s tariffs.

However, notice the changing role Tokyo is playing. Within Asia, it is the most vital partner for those looking to contain China’s rise. With the US abandoning its role as the bastion of free trade, Japan, once harried for its trade barriers and protectionist attitude, is increasingly the champion of more open market access. Japan is back? Let us not tempt fate. Instead, with the nation having been ignored for so long, let us be content to say that Japan is here.

Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.