The Japanese economy is going through a period of deep structural changes after its “lost decades”. Nomura says, there are four main themes – changes in labour market, software investment, a price-hike culture, and a new age of corporate governance, that would help redefining Japan’s economy.

Firstly, Nomura opines that the spring wage negotiations or ‘shunto’ in 2023 were a symbolic structural change in the Japanese economy. They reached the highest level in nearly 30 years. The asset manager sees a possible major slowdown in wage growth by 2024. “With the working-age population aged 15 and older declining rapidly and lower prospects for women and the elderly joining the labor force, so long as this decline in Japan’s population is a continuing phenomenon, we expect continued upward pressure on wages,” states Nomura.

Secondly, as capital investment slowed during the “lost decades”, Nomura points to a rise in software and capex spending. The deteriorating labour shortage is compelling companies to boost productivity. Hence, medium-sized and major companies are using system integrators to improve productivity and increase sales. On the other hand, SaaS companies are helping SMEs lower operating expenses. Hence, not just capital expenditure, but software spending is also on the rise. “We think the reopening of the economy following the Covid-19 crisis will result in the emergence of pushed-back capex demand, especially from the non-manufacturing sector,” predicts Nomura.

Thirdly, the asset manager highlights that Japanese firms could see a rise in profit soon as companies have raised prices to factor in the rising cost. “The culture of price hikes could help Japanese firms escape from the low margins that have been a weak point,” suggests Nomura. This also translates to increased shareholder returns. Nomura draws a parallel between Japan’s present-day equity market with the US stock market of the 1980s as it sees expanding equity returns. As per the asset, “total dividends paid by all listed companies in Japan for FY22 amounted to 18.2 tn yen, and share buybacks executed totaled 9.7bn yen, record highs in both cases.”

The fourth trend that is taking on the Japanese equity sector is the rising demand for corporate government compliance. Nomura believes that the changing shareholder structure and increasing shareholder activism have boosted the demand for corporate governance. Nomura notes a rise in activism in Japan at present. It cites FactSet data which shows a steady increase in activist campaigns since 2015, rising to 52 campaigns in 2022, a record high. However, Nomura sees a difference in the activism in present times. “While activists have historically been seen as seeking only to maximise short-term profits, today’s activists are more willing to point out problem areas in corporate governance.”

Nomura concludes by stating that among these major trends, price hikes in Japan are a major development for Japanese equities. “If Japanese companies can dynamically revise prices like European companies have done while adjusting employment practices, we see the potential for a 40% improvement in margins and ROE, which could push the Nikkei 225 up to 45,000”.

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