‘Third World’: Why locals don’t share investor enthusiasm for Japan

Japan is enjoying an investment and tourism boom, but many Japanese are struggling to make ends meet. Could this be another false dawn for the land of the rising sun?

Tokyo | After decades of being shunned for more exciting markets such as China, Japan is back in vogue among investors as it emerges from decades of stagnation and deflation.

Prices are rising in the world’s third-largest economy for the first time in 30 years; wages, though still low, are increasing for the first time in decades and the Japanese sharemarket hit a 33-year high in November.

The country is also enjoying a tourism boom, with visitors numbers now back at pre-pandemic levels, even without the return of Chinese tourists in large numbers.

Warren Buffett helped put Japan back on the global investment map in June when his Berkshire Hathaway investment vehicle bought stakes in five major Japanese trading houses, including Mitsubishi Corp and Mitsui.

Both of these, in turn, are important investors in Australia.

BlackRock founder Larry Fink then hosted a gathering of global investors, including Australia’s Future Fund, in Tokyo in October.

“The scars left by the popping of Japan’s property bubble 30 years ago are finally healing,” Future Fund chief executive Raphael Arndt told The Australian Financial Review last week.

“Corporate balance sheets are healthy, asset values are reasonable and, importantly, those scarred by the capital losses and use of excessive debt are leaving the workforce and being replaced with younger, more dynamic leaders.”

Dr Arndt is one of the growing number of global investors who now see Japan as attractive after years of low returns, a slow economy, a lack of risk-taking in the business sector and low or negative interest rates. The Future Fund put an overweight allocation to Japan several years ago.

While its asset class exposure to the country’s listed equities at June 30 was still only 8 per cent, according to the fund’s annual report, Dr Arndt says potential returns in Japan are attractive relative to the risks. Improving governance standards, government incentives to attract capital and an investor switch out of China are all upsides.

Australian business leaders are also visiting in droves, some on fact-finding missions while others want to tap into the vast amounts of capital on Japanese balance sheets.

Earlier this month, senior executives from ANU, Lendlease, JPMorgan Southern Hemisphere Mining and other Australian-based businesses were in Japan for talks with corporate giants such as Toyota and Panasonic as part of an American Chamber of Commerce in Australia delegation.

Telstra’s entire board and senior executive team also visited Tokyo last month, when they met with partners and other telecommunications and technology companies with a focus on data, AI and 6G. Telstra does not own any major businesses in Japan, but it part-owns cables in the country.

The boards and management teams of Lendlease and ANZ Bank have also visited Japan this year.

On their visits to the more well-heeled parts of Tokyo, they saw an image of Japan that appears to be booming: crowds of shoppers piling into Azabudai Hills, a glitzy new commercial complex featuring the tallest office building in Japan, and packed shops and restaurants in the commercial zones of Shinjuku, Shibuya and Ginza.

But as The Economist wrote in November, Japan has had many false dawns. An ageing and shrinking population poses myriad long-term problems, and there are also many short-term hurdles to full economic recovery.

Philip Turner – New Zealand’s former ambassador to Korea but also a long-time Japan resident – points out that ordinary Japanese people are not sharing the spoils of the country’s tourism and investment boom.

“Japanese consumers find themselves squeezed by a rising cost of living and surging housing prices, while incomes lag behind,” he wrote in a piece for the Asia New Zealand Foundation.

Prices are creeping higher for the first time in a generation, something that has come as a shock for many in Japan. At the same time, the economy contracted sharply in the third quarter, meaning the Bank of Japan is still likely to hold interest rates below zero.

The cost of living in Japan is lower than in Australia and other developed economies, but wages are way behind. Japan’s minimum wage is 1000 yen ($10.49) an hour, compared with $23.23 in Australia. The average monthly salary in 2022 was 311,800 yen, which is less than half of that in Australia.

The resulting cost-of-living squeeze, compounded by a weak yen, means the average person in Japan cannot afford a holiday abroad at the moment. This explains why visitor numbers to Australia have been so low against historic averages.

“I feel like I live in a Third World country,” one Japanese friend quipped.

This sentiment is reflected in the rock-bottom approval ratings for Prime Minister Fumio Kishida, who last week sacked four ministers to head off a political funding scandal.

His popularity was already on the wane, with cost-of-living pressures helping to drive his public approval to levels not seen since 2012. His government on Thursday agreed to income tax breaks aimed at offsetting the impact of inflation on households.

At the same time, Kishida is struggling to get the economy back on track.

His government is spending up big to bolster the country’s defences in a region where concern about aggression from China, Russia and North Korea is on the rise. There are stories in the Japanese media daily about military incursions in the South China Sea and Japan’s disputed Senkaku Islands.

This is all putting great strain on a bureaucracy that is trying to push through more reform in a year than most countries would do in a decade.

The Albanese government is monitoring Japan’s historic shift away from its post-war pacificism closely, but it is corporate Australia that is now sniffing around for opportunities from the country’s capital-rich trading houses.

Tokyo also has ambitions to be a global financial hub, but high taxes, convoluted bureaucracy and the language barrier means that dream is still a long way off.

“Japanese people aren’t hostile to foreigners, but the system is hostile to outsiders,” one senior retired Japanese executives who spent most of his career in the United States told me.

For now, Australian tourists and investors arriving in Tokyo will see a bustling city apparently brimming with wealth. But dig deeper, and they may discover a nation that is more uncertain about its economic prospects.