On August 2, 2024, in Tokyo, a man looked at the electronic quotation board showing the price of the Nikkei 225 stock on the Tokyo Stock Exchange. %.
Photography: KAZUHIRO NOGI/AFP, Getty Images
Of all the factors that are sure to dampen Prime Minister Shigeru Ishiba's holiday mood, foreign investors' love affair with Tokyo stocks is really taking its toll.
Since taking office on October 1, Ishiba's approval ratings have fallen almost as fast as the yen's value. A weaker yen would boost exports, which is usually a cause for celebration in the Nikkei 225. But the sell-off in international funds shows a very different dynamic.
As of the third week of December, foreigners had net sold more than $32 billion in Japanese cash, stocks and futures since January 1.
Of course, this is not a life-changing sum, and is far smaller than the size of the proposed acquisition of Japan's Seven & i Holdings by management of Canada's Alimentation Couche-Tard. For a $4.2 trillion economy, that's a drop in the bucket. With headlines cheering the Nikkei to end 2024 near 40,000, just shy of its all-time high, what's there to worry about?
Well, a lot actually. It is international capital flows that have driven the Japanese stock market to record highs in recent years. Global funds are rediscovering Japan after efforts to tighten corporate governance, diversify boardrooms and give investors a greater say in major decisions. Now, Japan is facing unprecedented headwinds that worry foreigners.
The biggest impact is the upcoming Donald Trump 2.0 presidency, which has the potential to spark a trade war the likes of which Asia has never seen. Although primarily aimed at China, any tariff offensive that shakes up Asia's largest economy, a major customer of Japan, would be enough to make investors reassess the direction of the Nikkei. Ishiba's disorientation is exacerbated by the diminishing likelihood that he will make progress on economic reforms.
As 2024 comes to an end, global investors appear to have woken up to this latter dynamic.
Shigeru Ishiba has never been fit to lead Japan. His surprise victory as leader of the Liberal Democratic Party seemed to have more to do with conservatives squeezing out the upstarts – one of whom is in his early 40s and one a woman – than choosing the 67-year-old Ishiba for his ability to govern. Since then, Ishiba's political missteps and drastic policy shifts have proven that he is not ready for prime time.
According to some polls, Ishiba's approval rating is in the mid-20s, making outgoing U.S. President Joe Biden look almost beloved. After a dismal performance in October's general election, Ishiba was able to hang on only through favors from opposition parties that stepped up to save the LDP from power.
This is not a good way to improve the level of competition in Japan. Shigeru Ishiba's Liberal Democratic Party predecessors came to power with bold talk of loosening the labor market, reviving innovation, boosting productivity, empowering women and weaning Japanese companies off their dependence on the weak yen. These include Fumio Kishida (2021-2024), Yoshihide Suga (2020-2021) and Shinzo Abe (2012-2020).
For example, Shinzo Abe led the Liberal Democratic Party back to power in 2012. Despite the progress, Abe has taken almost no action. Despite challenges, especially deflation, China continues to gain global market share.
Honda's sudden alliance with Nissan is proof of that. China's booming electric vehicle industry poses an existential threat to Japanese companies. Now it seems that China will lose the future.
Put all this together, and you can see why the Tokyo stock market's renewed luster in recent years is fading.
The Bank of Japan decided not to raise interest rates on December 19. Is it counterproductive now? Investors are keeping a close eye on Tokyo stocks as Governor Kazuo Ueda chooses not to tighten monetary policy despite Japan's inflation rising faster than average wages.
In the weeks leading up to December 19, traders everywhere were fully prepared for the Bank of Japan to raise interest rates from the current 0.25%. As Ueda's team stood aside, many believed the BOJ was worried about shaking up the stock market and causing the yen to surge. The Liberal Democratic Party's main governing partner, the National Democratic Party, is likely to put pressure on Ishiba to ask Ueda's Bank of Japan to ease policy on raising interest rates.
This creates a Catch-22 for investors. If Japan isn't ready to raise rates above a quarter of a percentage point after 25 years of near-zero rates, why should investors believe it's booming? If Tokyo doesn't think Asia's second-largest economy is ready to remove its currency intravenous line, why are CEOs raising their salaries?
As Japanese bulls abroad wake up to this, Tokyo must realize that now is the time to work harder to impress the “big money” in New York, London and Hong Kong. Otherwise, Japanese companies that are on sale will suffer losses as late 2024 may be insignificant compared to the future.
