Happy New Year to JAPAN Forward readers. We are pleased to bring you "Predictions 2024," a special New Year's series sharing the foresight and expectations of selected contributors for the coming year in their fields of specialty, continuing with Peter Tasker, co-founder of Arcus Investment.
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In 2023 normality resumed, or so it seemed. People stopped talking about COVID-19. No prime minister was assassinated. Inflation fell to reasonable levels in many developed countries.
Concerns about a Taiwan emergency faded as Russia's stalemated invasion of Ukraine demonstrated the risks of military adventurism. Despite concerns about a full-scale war in the Middle East, the oil price fell. What's more, America's Dow Jones Index hit an all-time high.
In other words, 2023 was, as predicted here, a "Pinker year," named after the optimistic Harvard University professor Steven Pinker, rather than a "Roubini year," named after the apocalyptically pessimistic author of MegaThreats Nouriel Roubini.
So, everything is fine now? Not at all. The geopolitical and economic fault lines are still there and could generate massive disruption at any time. They are currently held in check because everyone is aware of the dire consequences.
'Mixed Bag' on 2023 Predictions
Our other predictions proved to be a mixed bag, to say the least. The hope that the Brave Blossoms, Japan's rugby team, would take a big scalp in the Rugby World Cup, as they had in the previous two competitions, was not realized. This was particularly disappointing as Japanese sportsmen such as Shohei Ohtani in baseball and Kaoru Mitoma in football ("soccer" to some) have been in sensational form.
It was noticeable that Japan's rugby team contained quite a few veterans who had lost the speed and energy of previous years. Could it be the case that considerations of seniority are holding back the rugby team? Meanwhile, Ohtani and other Japanese stars overseas can give free rein to their natural talents.
As forecast, it was a bumpy year for the huge ESG (Ethical, Social, Governance) lobby. They ran into heavy political crossfire in the United States. One of the harshest critics of the concept is Professor Aswath Damodaran of Stern Business School. He recently described it as "born in sanctimony, nurtured with hypocrisy, and sold with sophistry."
His point that an "unconstrained" mandate– one that can invest in all stocks – will eventually deliver better returns than one that excludes supposedly "bad" industries is unanswerable.
Will 2023's Predictions Come True in 2024?
Well wide of the mark were our expectations about the currency market and domestic Japanese politics. Rather than rising as anticipated, the yen spent most of the year in the ¥140 to ¥150 (per US dollar) range, as US interest rates stayed remarkably high for a remarkably long time.
An early exit for Prime Minister Kishida seemed likely simply because that is historically what tends to happen after a long stay in power by a strong leader like the late Shinzo Abe. Yet Kishida has managed to cling to power despite sagging support ratings and a series of low-grade scandals.
According to investment guru Howard Marks, being too early is the same as being wrong. We were definitely wrong about the yen and domestic politics, but perhaps that was a case of being too early and the failed predictions of 2023 will be bang on the nail in 2024.
Cheap Yen and Politics in 2024
After all, the fundamentals are still in place. The Japanese yen is still extraordinarily cheap in purchasing power terms. Furthermore, the US, with a presidential election looming, is about to embark on a cycle of interest rate cuts.
Likewise, Kishida is suffering the fate of many weak Japanese prime ministers. He is getting caught between the priorities of the powerful financial bureaucracy and the desires of the public. If he does go, there is a sporting chance that his successor could be Japan's first female prime minister, as suggested last year.
The same could be said of our view that China would "pivot" to pragmatism in the Year of the Rat. That turned out to be half-correct, at best. Yes, the Chinese leadership has dialed down the "wolf warrior diplomacy." They sought more stable relations with the United States at a meeting between President Joe Biden and Chairman Xi Jinping.
Yet strong measures to stimulate the domestic economy, which is suffering from the collapse of a gigantic real estate bubble and traumatized consumer confidence, have yet to appear. Surely, they must though, as prolonged youth unemployment and deflation can only erode support for the regime. The barometer will be the Chinese stock market, which has been such a disappointing performer in recent years.
Five Scintillating Scenarios
1. Cosmopolitan Japan
Towards the end of 2024, Taiwan Semiconductor (TSMC), the world's largest manufacturer of highly advanced semiconductors, will open a plant in Kyushu, Japan's "silicon island". It has already started work on a second plant, and there is talk of a third. Taiwanese engineers have been transferred to Japan. And Japanese recruits – whose pay is well above the local norm – are being sent to Taiwan for training.
This move is driven by geopolitics, specifically the risk of China making a move on Taiwan. But in a wider sense, the same dynamic is requiring Japan to be more open, more Asian, and more influential. Shrinking, or being perceived to be shrinking, is a dangerous path to tread. It was the strategic far-sightedness of the late Prime Minister Shinzo Abe that led him to open up the labor market to foreign nationals.
Interestingly, it will soon be possible for foreigners to take the Japanese exams for taxi and bus driving. These exams are under the authority of the Police Agency. They will be available in any one of twenty foreign languages.
Opinions Change
Japan is facing a structural shortage of labor, and the transportation and delivery businesses are among the worst affected. Importing labor is the obvious solution. Opinion surveys by Pew Research and NHK, the national broadcaster, show that the Japanese public is more appreciative of foreign workers than most European countries and sees their contribution as a net positive.
The number of foreigners in the workforce has doubled over the last decade, thanks to Abe's reforms. Yet, the overall scale is still small at 1.8%, with the Vietnamese taking over from the Chinese as the largest ethnicity. From here, the increase could be quite rapid, given the encouraging attitude of the Japanese authorities and the tendency of immigrant communities to grow fast once critical mass is reached.
Like it or not, Japan is undoubtedly now a more strategically important player than ever before in the post-war era. Furthermore, it stands as an antithesis, though not necessarily a rival, to Xi Jinping's China.
It has fulfilled that role before. In the early twentieth century, Chinese dissidents and intellectuals – including Chiang Kai Shek and Sun Yat-sen – based themselves in Japan for long spells. Something similar could happen again, this time including Chinese tech billionaires and wealthy Hong Kongers as well as writers and artists.
2. Apple Swoops
Japan's stock market culture has undergone significant change over the last two decades. There have been new proposals, reforms, and codes coming thick and fast recently. The result has been to transform the relationship between companies and investors.
One noteworthy example is the new protocol for takeovers, set out by METI, the Ministry of Economy, Trade and Industry. Taboo for a long time in Japan, hostile takeovers should now get the green light if sufficient value is created for the shareholders of the target company – meaning that the price is high enough.
In fact, that is what happened in August 2023. Electric machinery company Nidec launched an out-of-the-blue bid for Takisawa, a smaller company that produces machine tools. Takisawa's initial response was to reject it, but Nidec, citing the METI document, won the argument.
How can companies protect themselves from being taken over? Easily – by removing themselves from the stock market and going private. Several well-known companies did exactly that in late 2023, taking the MBO (management buyout) route to a takeover-free existence. Others may follow, deciding that the increasing hassle and risk of being listed is no longer worth it.
What about a large-scale international takeover using the METI playbook? It seems that top staff of Microsoft discussed buying Nintendo before deciding on Activision Blizzard. Given the huge scale of the market capitalization of the "Magnificent Seven" (Apple, Tesla, Nvidia, Microsoft, Alphabet, Amazon, Meta) not even the most iconic Japanese companies could be safe from their clutches.
3. Back to Deflation
Japan's Producer Price Index soared to +10% in December 2022, the highest level since 1980. One year on, it has collapsed to +0.3% - and further declines are certain, given the falling oil price and a stronger yen.
Producer prices, the costs that companies incur when they buy their inputs, are more volatile and quicker to respond than consumer prices. But they do signpost the direction of travel. If they sink into negative territory and stay there – as is likely – it will probably mean that inflation is past its peak for consumers too.
That is not necessarily a bad thing. Indeed, it could set off a mini-boom as prices flatten out while wages continue their steady rise and Japan's terms of trade improve. On the other hand, it could give the Bank of Japan a headache as its inflation target of 2% on a sustainable basis will not have been realized.
4. Green Resistance
As governments across the developed world prepare their citizens for the coming of "net zero" with all the lifestyle changes it implies, resistance is starting to mount. Already populist parties in many European countries are using the issue to gather support.
The stock prices of many illustrious auto companies are telling a disturbing story – they have no future in this brave new world. Meanwhile, China – by far the largest exporter of electric vehicles – has an energy mix that is 80% fossil fuel, mostly coal.
Most governments have signed up for bans of various kinds on conventional ICE cars. But as the deadlines get closer, many will be tempted to push them out further, as the UK has just done.
The most important actor is the United States, and what happens there will be significantly impacted by the upcoming elections. Despite the tremendous success of Tesla, only 8% of US auto sales are EVs. The other 92% are not.
The energy transition is undoubtedly underway. But governments have sought to compress the necessary timeframe by using a panoply of carrots and sticks and now risk facing a backlash. Japan has been far from blameless. In 2020, the government went along with the Europeans in pledging deep cuts in emissions, which would take them down to 46% of 2015 levels by 2030.
That was totally unrealistic, given Japan's topography. Even now, Japan's energy mix is 84% fossil fuel, nearly all of which is imported. And EVs have a tiny share of the auto market. If the growing "green resistance" overseas does lead to a more realistic approach to the energy transition, that can only be a benefit to Japan and its industries.
5. Nicer and NISA
The world's first properly organized futures market opened in 1710 – in Osaka, Japan. Two centuries on, Japan's defeat of Imperial Russia in 1905 could not have happened without the bonds it floated in the US and Britain to finance warships and weapons. Which is to say that Japan has been financially sophisticated for a very long time.
So there is no reason why the new Nippon Individual Saving Account (NISA) should not, over time, be as big a success as its model. That is the UK's ISA. Certainly, the government has set a super-bullish target, expecting the total amount of these tax-free accounts to reach ¥34 million JPY ($240,000 USD) in five years with assets doubling to ¥56 trillion JPY ($396 million USD).
Most people will invest via funds, and there appears to be a strong attraction towards the best performers of recent years, US and Indian equities. Yet, if trade paper Veritas is to be believed, there is significant interest in Japanese small and medium stocks too.
Japan's once thriving equity culture took a heavy hit from the collapse of the 1980s bubble economy and the consequent long years of stagnation. That is ancient history now, and the NISA scheme, due to start in early 2024, should mark the start of a new phase of Japan-style shareholder capitalism.
Bonus Scenario: Medals Galore for Japan at the Paris Olympics
Japan triumphed in the Tokyo 2020 Olympics simply by holding them in the teeth of the COVID-19 hysteria and a bizarrely negative press campaign. The closing ceremony was unforgettable, with its drone display of the Earth in orbit.
Undeterred by the outcome of the Rugby World Cup, we expect Japan to do well at the 2024 Paris Olympiad.
There are two reasons for optimism. First, Japanese athletes have been performing strongly in a wide variety of sports, from basketball to skateboarding.
Second, Olympic host countries usually ramp up the sports budget in the years leading up to the event, and the statistics show that the effect of better training and equipment, etc lasts at least another four years.
Result: Japan's medal haul puts it in the top four most successful national teams.
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- Read other predictions from our series, Predictions 2024.
Author: Peter Tasker
Find other essays and analyses by the author on JAPAN Forward.
