What Has Gone Wrong With Japan’s Stock Performance Over the Last Three Decades?

Abstract

Japan has a poor stock performance compared with the US in three decades (1989-2019). At the end of 1989, the Nikkei 225 Index reached its all-time high (38,916); by the end of 2019, the index was 23,657, a change of −39% over the entire period. Meanwhile, the S&P 500 Index increased from 353 to 3,231, a change of 815%. To comprehend this matter, we investigate the areas of economic conditions, corporate governance, corporate financial policies, corporate financial performance, and relative valuation. Our research method is a combination of qualitative and quantitative approaches. Our analyses reveal a variety of problems: slow GDP growth, weak legal protections and low governance ratings, insiders-dominated and cross-holding ownership structure, excess financial assets, low profitability, slow growth of earnings and revenues, and contraction of relative valuation. In the most recent decade (2009-2019), we note some improvements: expansionary monetary policy, productivity growth, better corporate governance, increased dividend payments and stock repurchases, earnings growth, and enhanced profitability. Therefore, Japan’s transformation is substantial, though it is gradual and incomplete.