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Japan is not just exiting from deflation but also from three hierarchies that created rigidity in both labour and capital market.
So on the business side, “customers above suppliers” hindered companies from price hike and pursuing profitability. We have no major religion in Japan but there is one God, its customers. For instance, sushi chefs would say, they are “proud to serve you quality Omakase at 5000 yen for a decade.”
On the corporate side, “employers above employees” blocked wage growth, labour mobility and productivity. We have a culture: “no wage growth but no complaint” because of lifetime employment. Seniority and facetimes matter more.
On the equity market, “companies above shareholders” slowed ROE growth and shareholding return improvement. We have a saying, “companies belong to employees, not shareholders.” But these three walls have been collapsing. Companies used to prioritize to prepare enough SKUs to provide perfect services for customers regardless of low profitability. During COVID, companies couldn’t do so, so they made less, charging more, and ended up having higher profitability. Managements finally noticed, “Why didn’t we do this before?” The important part is companies said they would not go back to previous strategies anymore.
The Japan rally started when Asian investors realized the change, shifting allocation to Japan in March 2023, while domestic and western investors who looked at Japan for a long time were very sceptical. Japan has long been underweighted and as those sceptical investors began to believe in this story, investors gradually neutralize the allocation but inflow wise, still below the Abenomics level.
Further, we should not forget how low base Japan is starting from. Wage growth in US since 1990 up by 53% while Japan has been flat. TOPIX average OP margin 7%, ROE 8%, which is only half of S&P. Valuation wise, still 50% of TOPIX companies are below book value as of now. It takes at least about three to five years to normalize economy and corporate structures. After the bubble burst in the 1990s, the three surpluses of labour, facilities, and debt deepened the deflationary environment, but now we have shifted to the three shortages. How corporates deploy the cash accumulated during deflation to resolve those shortages is very critical.
TSE defined prime market as companies who constructively communicate with global investors. And as we talk to TSE, we sense that not only the evaluation from TSE, but also from investors, is a key for reform going forward. Upon request, I presented to a hundred plus senior corporate executives on how they can expand enterprise values, so corporate mindset is definitely changing.
