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The View | Japan’s split-screen economy: roaring stocks and shrinking GDP
- The Japanese economy is a study in contrasts, with a soaring stock market and record corporate profits set against stagnant wages and shrinking GDP
- Decades of prioritising a weak yen over structural reform have deadened Japan’s animal spirits and hurt its attractiveness as an investment destination
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If ever there was proof that a nation’s economic health and stock market dynamics are two entirely different things, it’s present-day Japan.
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As the Nikkei 225 Stock Average soars to the highest since 1989 – the height of Japan’s “bubble economy” era – gross domestic product is cratering. After shrinking 3.3 per cent in the July-September period year on year, it contracted another 0.4 per cent in the fourth quarter.
The government is trying to spin this as a “technical” recession. That’s Tokyo-speak for “no big deal”, yet there is little cause for optimism when you look at the breakdown of Japanese GDP in late 2023.
The data depicts weakness in consumption, capital expenditure, public investment and home sales. The downshift in China, Japan’s top trading partner, does not augur well for exports going forward. All this complicates the Bank of Japan’s (BOJ) plan to raise interest rates.
Not long ago, economists were certain the BOJ would exit quantitative easing (QE) and raise rates as soon as March. That calculus is changing as recession risks deepen and China’s economy slows. Markets are also realising that the US Federal Reserve won’t be cutting rates as quickly as hoped, meaning global bond yields may remain elevated. As such, the idea of BOJ tightening is becoming fanciful.
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As these debates play out, Japan’s economic challenges make for a tantalising split screen with a stock market testing 35-year highs. On one screen is a once-in-generation equity rally capturing global investors’ imaginations.
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