Investors Could Do Much Worse Than ‘Japanification’

Japan’s real economy performs well given the country’s demographics, and financial markets have provided many opportunities for returns

By Mike Bird

Japan has pulled millions of additional workers into the labor force, particularly those over 65 years of age. Photo: toru yamanaka/Agence France-Presse/Getty Images

As bond yields have dropped around the world this year, an old specter has again begun haunting markets: “Japanification.”

Former Bank of Japan chiefMasaaki Shirakawawas the latest to warn about the dangerous prospect in a speech last month.

The phrase is a code word for meager growth, nonexistent inflation and ossified financial markets.

But relative to its parlous reputation, Japan’s economic performance has been strong, especially in the context of its shrinking population.

And its financial markets have provided solid opportunities relative to most of the world.

One reason: Japan has done very well at boosting the productivity of those workers it does have.

Since 2010, Japanese labor productivity growth—measured by GDP per hour worked—has outstripped its G-7 peers, rising 6.5%, compared with an average of 5.8%.

Japan has also pulled millions of additional workers into the labor force, in particular raising labor market participation for females and those over 65 years of age.

In real terms, Japan’s GDP per member of the working-age population—usually defined as those between 15 and 64 years old—has risen faster than any G-7 economy since 2007.

The nation’s overall GDP per capita has risen 7.1% in the same period, not much worse than the 9.4% recorded in the U.S., and better than the 4.3% record in the U.K.

Proponents of the ‘Japanification’ thesis often point to low or subzero government bond yields.

But the entire Dutch and German government yield curves sit below Japan’s, while Switzerland’s lingers far lower.

Since those countries have higher long-term inflation expectations than Japan, in real terms their government bond yields are even lower.

Whatever the risk of such low yields, it is a situation that has been around for years.

As far as equities go, Japan has the second-best performing market of any major investible country in the past decade.

Its earnings growth has matched that of the U.S.

And in some sectors, particularly among industrial and manufacturing firms, Japanese companies have outperformed U.S. rivals.

Japanification is in essence the result of two major forces: demographics, the impact of which can be overstated, and an extended legacy of poor policy decisions, in no small part due to a reticence about pursuing sustained fiscal stimulus.

Other countries shouldn’t follow Japan’s example on the latter.

But especially in the equity markets, demographics aren’t destiny: Japan has proved that plentiful returns are possible in a low-growth environment.

Of the many things to fret about, becoming Japan should be low down on the list for investors.

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