Introduction

This week we talk about the Meiji Revolution, shoguns, and the Lost Decade.

We also discuss NVIDIA, economic bubbles, and the Tokyo Stock Exchange.

Recommended Book: The Blue Machine by Helen Czerski

Transcript

What became known as the Meiji Restoration, but which at the time was generally, locally, called the Honorable Restoration, refers to a period of massive and rapid change in Japan following the restoration of practical powers to the country's Emperor.

In 1853, the arrival of Commodore Perry and his warships in Japan forced the country to open up trade to the rest of the world, initially with the US but shortly thereafter with other nations, as well. This led to the signing of a series of treaties that were heavily slanted in favor of those other nations, at Japan's expense, and the Meiji Restoration was a consequence of those humiliating treaties, which were essentially forced and enforced by military might, not because Japan wanted anything to do with these foreign entities and their money and goods.

So in the 1860s, some reformist political leaders in Japan started to support the Emperor, who had become something of a ceremonial figure in recent generations, during the country's multi-century seclusion from the rest of the world, and this, among other things, led to a decision by those in charge, who now had more power at their disposal, to shift from a feudal society into an industrialized one.

There was a fair bit of tumult and internal conflict during this period, but the eventual upside was the re-centralization of the country and its land and other assets under the Emperor, away from the shoguns who had been running their own pseudo-countries within Japan for a long while, alongside an order that the country would do a complete 180, no longer isolating itself and eschewing anything foreign, instead seeking knowledge far and wide, wherever it originates, sending folks around the world to discover whatever they can, and to then bring that understanding back to Japan, to strengthen this new iteration of the nation.

By the end of the 19th century, industrialization was the name of the game in Japan, and those in charge had successfully encouraged civilians to bolster the economy by tying its success to the country's military success.

Other governments were happy to play into this transition, as it meant enriching themselves, as well, creating a new, modernizing trade partner that they could exploit but also invest in, and this led to a doubling-down on rapid modernization by the the government, including the culling and destruction of traditional practices, landmarks, and social classes, which wasn't popular amongst the nation's many samurai and other previously celebrated and upper-class people, but it did help the government further centralize power and influence, and reorient things toward economic success and away from a more feudal style of distributed military-backed fiefdoms.

This allowed Japan to become the first non-Western great power, and it's what allowed them to grow to the point that they could take on half the world in World War II, expanding their control throughout Asia and across the Pacific.

Because Japan suffered relatively less from the Great Depression than most Western nations, it was also in a pretty good spot compared to the countries that would become its opponents in WWII leading up to the conflict, and its GDP growth in the 1920s and 30s is part of what allowed it to expand so rapidly across Southeast Asia, grabbing a lot of Chinese territory and turning much of the region, including parts of the Philippines, Burma, Malaya, and Thailand into plantation-like colonies.

The war and post-war periods, though, were a lot less great for Japan, as essentially all the economic gains it made during the Meiji Restoration were lost, their manufacturing capacity wiped out, their infrastructure destroyed, their population numbers depleted, and their civilians psychologically scarred by the drawn-out war and its eventual arrival on their doorstep.

Japan lost its colonies, and as tends to be the case with post-colonial nations, it had to endure a period of economic recalibration, as it could no longer rely upon cheap labor and commodities from these colonies.

It also had to make changes based on the treaties it signed upon its surrender, shifting resources away from its military—which had been a major focus of its entire culture and economy until this point—and moving from an imperial system into a democracy.

The country was then occupied for years, and the previous landlord class that owned much of the country's rural territory was dissolved, the land distributed to the tenant farmers that worked it.

Huge business conglomerates that were close with the government, and which owned much of the economy for about a century were also broken up, and new laws that encouraged business competition and discouraged monopolistic practices were enacted.

After Japan's manufacturing capacity was restored and people were able to rebuild their homes and businesses and everything else that had been destroyed during the war, Japan opened up to international business entities, invested heavily in industries that other countries valued, like chemical production and information technology, and from the 1960s onward, this led to a surge in the country's economy, Japanese industry seeming to always get the jump on its international competition, especially in high-tech fields, like the burgeoning electronic appliance, television, and personal computer markets.

What I'd like to talk about today is how Japan's fresh, 20th century rise fizzled out at the dawn of the 21st century, and why its stock market is booming, now, despite other economic indicators saying the opposite.

—

Things weren't perfect for Japan in the latter-half of the 20th century—they, like much of the rest of the world, experienced an oil crisis in the 1970s, for instance—but they really did chart an impressive economic trajectory for most of the 60s, 70s, 80s, and 90s.

Their success was even more impressive in comparison to other wealthy nations at the time, as that oil shortage, mostly the result of geopolitics, hampered growth in the West, especially the United States, and that allowed Japan to steal a march on its main, electronic hardware and automobile industry competition.

Japan was also in a good spot to profit in these spaces because it had a well-educated population that was used to working long, arduous hours, the former the result of a huge investment in schools, post-WWII, and the latter baked into the culture for generations, due to the country's long history of feudal governance and philosophies that celebrate labor as a moral pursuit.

This allowed Japan to attain a spot amongst the most successful economies in the world, achieving the third-largest gross national product in the 1970s, following only the US and USSR, and achieving first place in the same by 1990.

Previous waves of economic growth in the country had been spurred by exports, but the boom in the late-1980s that led to its 90s-era success was caused by an increase in local consumption, and that, in turn, increased the nation's imports, to feed still-increasing local demand for all sorts of luxuries, alongside fundamentals that were being upgraded, like medical services, leisure-related goods, and basic quality-of-life improvements.

This period was also marked by heavy investment in telecommunications and computing research and development, and that made it the home of the world's largest stock exchange, the Tokyo Stock Exchange, as everyone, everywhere around the world wanted to invest in the most up-and-coming companies, most of which were operating in these industries, and many of them were thus based in Japan, whose cities felt like a sort of science fiction glimpse at the future compared to cities located elsewhere during this period.

Beginning in 1989, though, Japan started to run larger and larger trade surpluses, the yen grew in value, and Japanese citizens were encouraged, through a variety of tariffs and other policies, to save their money rather than spending it.

This led to a period in which businesses were incentivized to buy their foreign competitors rather than investing locally, because their yen bought more overseas than in-country, and this further appreciated the value of the yen, increased the trade-surplus even further, and led to a boom in financial assets, which led to a lot more speculation on the Japanese financial assets market.

That increased popularity in financial speculation led to banks making riskier loans and the rates dramatically increasing on bonds, stocks, and housing, and that, as we've seen happen elsewhere over the years, led to a real estate bubble that made it difficult for Japanese citizens to afford housing, but which also, eventually caused an economic crash, all that investment that was aimed at booming Japanese businesses suddenly flooding outward, instead.

This led to less investment in tech-centric R&D, which led to less-competitive Japanese businesses that were suddenly unable to compete with their foreign rivals, and that, combined with low local consumption, because a lot of people lost their savings in popped-bubble assets and were thus no longer spending as enthusiastically as they had been.

This led to a deflationary spiral that was amplified by banks continuing to hand out money to basically anyone who asked, leading to even more bad investments and the emergence and popping of a number of smaller bubbles into the late-1990s.

The government was forced to subsidize the banks that went under because of all those bad investments, and they did the same for businesses that could no longer do much of anything, but which continued to technically function, earning them the monicker "zombie businesses," of which there were many across Japan.

This period, during which the country's meta-financial bubble slowly collapsed, rather than dramatically popping, has become known as Japan's lost decade, and despite moments of optimism here and there in the years, since, it has arguably become a lost couple of decades, as the government's many attempts to address its deflation and the devaluation of its stock market and larger economy haven't done much to stop the bleeding, and the slow-growth its Nikkei stock index has seen since late-2012 as a result of efforts to increase the country's money supply and eliminate deflation was halted by the implementation of significant new consumption taxes, the damage caused by a huge super typhoon in 2019, and the global recession sparked by the arrival of COVID-19 in 2020.

All of which makes recent news out of Japan, that the country's Nikkei index reached a record high, surpassing its 1989 bubble-era peak in late-February of this year, a bit surprising.

After all, most of the fundamentals in the country haven't really changed, not enough to significantly nudge the needle, anyway, and the other big headlines about Japan's economy, of late, have been about the recession that it entered at the end of 2023.

Data released the same month the Nikkei hit that 34-year high indicate that at the tail-end of 2023, Japan entered a recession, and adding insult to injury, fell off the list of the world's top-3 economies, ceding its third-place position (after the US and China) to Germany—which also isn't doing great right now, but is still doing a bit better than Japan.

What seems to be happening is that COVID-era recession is still weighing on consumer spending in Japan, and the country's industrial output is still low, wages are still low, and inflation is eating up the excess money folks have managed to put away.

This has hurt the country's somewhat-burgeoning service industry, as folks aren't spending on services anymore, lacking enough extra money to do so, and capital spending seems to be stalling, as well, leading to production stoppages at automotive plants, which have reportedly been amplified by a lack of skilled labor, which is itself a problem tied to both insufficient pay and a rapidly aging population.

The jump in the stock market, in contrast, seems to be the result of AI-linked enthusiasm throughout global markets.

Chip-maker NVIDIA has been a huge success story in the US, propping up the market there, and serving as a sort of stand-in for AI optimism more broadly, because it makes the majority of the best, most AI-centric high-end computer chips, and that has led to a surge in its valuation, but also that of other companies even tangentially connected to it and its industry.

Japan houses several such companies, including Tokyo Electron and Advantest, which make equipment that NVIDIA relies upon, and Japan actually still makes computer chips, even if its not as competitive as Taiwan-based TSMC or Netherlands-based ASML, which makes the machines that make chips.

Japan, then, is in a relatively favorable position if this surge in AI-investment continues, because it has the infrastructure and skilled laborers necessary to build-out a hopping high-end chip manufacturing base—so investments are throwing money at some local, relevant companies in the hopes that they'll pay out in the way NVIDIA is currently paying out; which is a lot.

The Japanese government is leaning into this, recently announcing about $68 billion in resources for chip-making companies and related entities in-country, which is a big bet to make, but similar to bets being made by other governments, all hoping that chips will become the next oil, and that they'll be in a position to become market leaders over the next decade, benefitting from further investment, and from that increased long-term capacity of this increasingly fundamental resource.

All of which may or may not play out in their favor, as there's a chance a lot of the hype in AI right now does turn out to be just hype, similar to what we saw with crypto-assets a handful of years ago.

There's also a chance that Japan's fundamentals just aren't where they need to be to sustain this kind of build-out, which would leave them with a lot of incomplete or non-competitive assets that further drain the country's economy and bank account, without providing much in the way of long-term payout.

In the meantime, though, Japan's economy is incredibly uneven, the majority of people continuing to suffer under high-levels of inflation and wages that aren't keeping up, while a relative few are seeing their stock holdings boom, earning a lot more than they have in recent decades from these sorts of investments, and hoping that trend continues.

Show Notes

https://www.imf.org/external/pubs/nft/2003/japan/index.htm

https://www.imf.org/external/datamapper/NGDPD@WEO/JPN

https://www.bloomberg.com/news/features/2024-02-20/japan-s-67-billion-bet-to-regain-title-of-global-chip-powerhouse

https://www.reuters.com/markets/asia/tokyo-stocks-rally-many-japanese-find-themselves-left-behind-2024-02-22/

https://www.investopedia.com/5-things-to-know-before-the-stock-market-opens-february-22-2024-8598465

https://www.ft.com/content/8b982ad2-8923-4f48-adc6-946c10964657

https://www.wsj.com/finance/stocks/japans-nikkei-after-34-years-briefly-tops-record-close-in-intraday-trading-7c29e029

https://www.ft.com/content/1539d638-7499-4dc9-af4f-8a8f2a06ec9b

https://www.nytimes.com/2024/02/22/business/japan-stocks-record.html

https://spectrum.ieee.org/intel-18a

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit letsknowthings.substack.com/subscribe