In Contrast to China, Japanese Economy Surges With Historic Stock Market Peak

An electronic board displays stock prices of companies listed on the Tokyo Stock Exchange, along a street in Tokyo, on Feb. 26, 2024. (Kazuhiro Nogi/AFP via Getty Images)

On Feb 24, Japan’s Nikkei Stock Average closed at an all-time high of 39,098, surpassing its historic high of 38,915 points, set 34 years ago on Dec. 29, 1989. The figure has become of sign of economic optimism, a sign that Japan has decisively broken free from its “lost decades,” the prolonged period of economic stagnation following the bursting of the Japanese asset price bubble beginning in 1990.

The Japanese stock market boom is in stark contrast to the current struggles of China’s stock market. The new year got off to a tumultuous start for Chinese stocks, with Newsweek proclaiming on Jan. 16, “China’s Stock Market is in Free Fall.” By early February, exchanges in Hong Kong and Shanghai had lost more than $1 trillion in market value, and the Shanghai Composite had dropped to a five-year low.

Although the Chinese stock market was slightly less turbulent by early March, Japan’s Nikkei 225 continued to thrive, surpassing the 40,000 mark.

Meanwhile, Chinese Communist Party (CCP) propaganda tried to revive confidence in the economy, with state media Xinhua News saying on March 5 that the Chinese economy had shown “solidity and resilience in 2023” and touting the country’s “robust domestic market.”

Economic Recovery Amid Weak Domestic Demand

On NTD’s Chinese language program “Pinnacle View,” analysts compared the Japanese and Chinese markets recently.

Lee Jun, a Chinese independent TV producer based in the United States, noted that Japan’s economic recovery did not begin recently. It has been percolating since the time of former Prime Minister Shinzo Abe, he said. The late Mr. Abe’s policies were aimed at stimulating Japan’s economy and led to a gradual warm-up of its stock market and real estate market, he said.

In 2013, the Nikkei Stock Average was only at around 8,000 points. Now, it has surged to over 39,000 points, surpassing the high point set 34 years ago. This marks a significant economic achievement.

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Mr. Lee noted that property prices in Japan are also recovering. He said: “After the burst of the real estate bubble, Japanese property prices plummeted by 20 percent, 30 percent, and even up to 60 percent. However, from around 2012, they started to rebound. Property prices in Tokyo have surged over the past two years, making investments in Japanese real estate profitable.”

Taiwanese researcher and macroeconomist Wu Jialong said on the “Pinnacle View” program that Japan’s era of deflation is coming to an end, with inflation rates stabilizing above 2 percent. However, Japan is now experiencing import-driven inflation, rather than inflation driven by domestic demand. The financial sector, such as the stock market and real estate market, may perform strongly, but domestic demand is still not strong enough.

“Japan continues to maintain its loose monetary policy, hoping to buy time for domestic consumption, investment, and employment,” Mr. Wu said. “Thus, the Bank of Japan has been hesitant to normalize its monetary policy. If the Bank of Japan normalizes monetary policy, the [Japanese] yen will appreciate, which can counter import-driven inflation.”

The Yen’s Past Appreciation

Mr. Wu said on the program that when the yen appreciated, Japanese companies had to move overseas to areas with lower wages to reduce costs.

He explained: “At that time, Japan’s export industry, essentially in the automobile sector, devised a method [of reducing costs]. Some parts were manufactured in the Philippines, others in Indonesia, and [others] in Malaysia. Finally, all parts were shipped to Thailand for assembly into cars for sale.”

Mr. Wu believes that in the past, it was reasonable for the United States to pressure the yen to appreciate—primarily through trade disputes—because the U.S. trade imbalance was severe. Essentially, Japan used other countries’ savings by generating large trade surpluses and exporting them overseas. These countries essentially consumed savings in advance, resulting in negative savings. Eventually, the situation became unsustainable and these countries, such as the United States, had to address the trade imbalance.

“When the yen appreciated at that time, it did cause significant damage to the Japanese economy,” he said. “The reason was that the Bank of Japan did not dare to let the yen appreciate significantly for fear of harming the competitiveness of [Japan’s] businesses. It used a gradual approach to appreciate the yen. As a result, everyone knew that the yen’s appreciation was not over yet, so the financial markets developed an expectation that the yen would appreciate.”

The result was a flood of foreign capital and Japan’s stock and real estate bubble, leading to a prolonged period of deflation.

In conclusion, Mr. Wu said he believes that Japan’s bubble economy three decades ago was not caused by pressure from the United States but rather by Japan’s mishandling of its monetary policy.

Fundamental Reasons Why China Lacks Innovation

According to Mr. Wu, Japan has overcome the middle-income trap and possesses strong research and development capabilities. Today’s Japan is a highly developed and highly innovative country.

By contrast, China now finds itself in the middle-income trap—an economic development in which a country becomes entrenched at a certain level—according to the IMF’s projection for GDP growth in 2025 and 2026.

Mr. Wu said that the reason for this is China’s failure to understand how to move from imitation to independent innovation.

“Xi Jinping talks about independent innovation, but the conditions for independent innovation are not yet available in China,” he said.

Mr. Wu listed three fundamental differences between Japan’s economic success and China’s failure to “catch up.”

First, he said, investing in people is key—and should take priority over investments in construction, infrastructure, or other areas. Investments in education, healthcare, and the social safety net constitute an investment in a nation’s people, which will lead to productivity and innovation in the workplace.

Individual liberty is another key to success. This includes freedom of the press, freedom of speech, and freedom of thought and belief. Without personal freedom, no economy will be able to promote innovation.

Third, private property rights and intellectual property rights must be protected. Without such protections, there is a lack of incentive for technological innovation.

“Only when you have all these can you see a continuous trend of creativity and innovation, which Japan has,” Mr. Wu said, contrasting the two nations. He dubbed the CCP’s “thousand talents plan” a plan to “steal from other countries” and said it’s to blame for China’s lack of innovation and rampant intellectual property theft.

According to Mr. Wu’s analysis, the root of China’s inability to achieve independent innovation lies in the regime’s political system, China’s lack of freedom and rule of law.

Michael Zhuang contributed to this report.