Musha Research Commentary

5 February 2024

S\Strategy
Bulletin (No. 348)

FOMO on Japanese Stocks Causes Economic Virtuous Circle

People Fear the Risk of Not Owning Japanese Stocks
There is a Wall Street expression "FOMO," which stands for "Fear of Missing Out,"
meaning the fear of being left behind. The Japanese stock market is now entering
just such a state. People have finally realized how ridiculously undervalued Japanesestocks are and are seriously considering the risk of not owning Japanese stocks: 1)
Foreign investors are rushing to increase their weight of Japanese stocks (see Figure1), which rose the most among the world's major markets last year; 2) Individual
investors are experiencing an investment boom due to the start of NISA reform; 3)
Corporations are buying back their own shares under pressure from the Financial
Services Agency and the TSE, which are demanding that P/B ratios of less than 1x
be corrected, and 4) Pension funds and other institutional investors are forced toreduce their investment ratios in JGBs and shift to stocks in the face of entrenchmentof inflation and rising interest rates. The surge in stock prices since the beginning ofthe year has been a result of the rapid rise in the stock market. The sharp rise instock prices since the beginning of the year is an indication that the equity-driven
fund management system has begun in Japan as well.

Musha Research Co., Ltd.
President
Ryoji Musha
musha@musha.co.jp
http://www.musha.co.jp
Tel ＋81-3- 3740 2143
2-16-7-3912, Konan,
Minato-ku, Tokyo
108-0075,Japan

Figure 1: Stock Market Performance by Countries

Results Show the Overwhelming Superiority of Stock Investments
Since 2013, when Abenomics started, the Nikkei Stock Average has quadrupled from 9,000 yen to 36,000
yen. In addition, in terms of income flow, while the interest rate on deposits is almost zero, stocks have an
overwhelming advantage with a dividend yield of 2% and an earnings yield (profit/share price) of 6%. Thereis a huge disparity depending on whether one chooses to invest one's wealth in stocks or leave it in deposits.
It appears that those who are beginning to feel impatient with the fact that they are falling far behind in wealthbuilding are beginning to act.
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U.S. households have become significantly richer through stock investments, and this has
become a source of strong consumption
For more than 30 years since the bursting of the bubble economy in Japan, extreme risk aversion has
covered the financial markets, with investors willing to accept zero return as long as they can maintain theirprincipal. This contrasts sharply with the U.S., where risk-taking and investment in equities have significantly
increased wealth. Japanese households have 73% (¥1107 trillion) of their ¥1508 trillion in investable financial
assets in bank deposits and cash, and only 21% in stocks and investment trusts. In contrast, U.S.
households have allocated 72% of their $82 trillion in investable financial assets to stocks and investment
trusts, with cash and deposits accounting for only 18% (Figure 2). This equity-dominated U.S. asset
management has resulted in significant wealth formation, as U.S. equities have risen significantly, by a factorof 7, since the GFC. The net wealth held by U.S. households increased 2.6-fold from $59 trillion immediately
after the GFC to $154 trillion in 2023. Over the past 13 years, households' net worth has increased by about$100 trillion-, or four-times GDP. This wealth formation due to rising stock prices has stimulated U.S.
consumption and become a driving force for the economy (Figure 2).

5: Household
PPP and Dollar/Yen
Punitiveto andBeneficial
Figure 2:
financial trend
assetfromholdingsJapanthe U.S.
(¥/US$)

360
330
300 U S270
$81.6tril.
240

From
Investment
trustspunitive strong yen to benefiicial weak yen
16.6Others
3.8
Currency
Punitive strong Sharesyen
Beneficial& otherequities weak yen& deposits
55.1 Spot rate < PPP
17.6
Bonds
6.9

Investment
Bonds trusts 6.0
1.8

210

Others
3.9

180
Japan
150

Currency & deposits
Domestic-foreign
73.4
price differentials

120¥1,508tril.

90
60

JPY/USD spot rate
2022/12/31 131.5
2023/11/7 150.0

InversedomesticShares & other foreign
euquitis
PPP 14.9 price2022 95.2
differentials
80%
100%

0%
20%
40%
60%
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 21
Source:OECD,Note:
AsMusha
at MarResearch
2023, Exc. insurance policies, annuities, and fixed guarantee
Source: BOJ, Musha Research

What is preventing the U.S.-style virtuous cycle? (1) Withholding of profit by corporations
Can the U.S.-style virtuous cycle of rising stock prices leading to increased wealth effect ➡ increased
consumption ➡ economic growth ➡ rising stock prices take root in Japan? If this were to happen, it would
raise the Japanese economy and people's standard of living. The current boom in Japanese stocks is a
glimpse of this possibility.
Until now, although companies in Japan have generated ample profits, low stock prices have not increased
the wealth of households, and corporate profits have not been sufficiently linked to a virtuous cycle in theeconomy. The primary reason for this is that majority profits earned by Japanese companies have been
stored within the companies and have not been linked to demand expansion and growth. In the U.S., almost
80% of corporate profits are returned to shareholders in the form of dividends and share buybacks (Figure4). In the U.S., the only major source of investment in stocks during the 10 years until 2020, when households
began to invest in stocks through social networking services, was share buybacks by corporations. The
stock market rally after the GFC was solely the result of share buybacks (Figure 5). (Figure 5).
In contrast, the shareholder return ratio of Japanese companies is only 40%, half that of the U.S., throughdividends and share buybacks, and companies invest majority of their profits in financial assets and leavethem idle. Part of this is strategic overseas investment, but the equity ratio is abnormally high (Figure 6).
The demand by the FSA and TSE for corrective measures for companies with P/B ratios below 1x is a call

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Strategy Bulletin vol349

for effective use of corporate retained earnings. We expect an increase in corporate share buybacks, adramatic improvement in ROE and other capital efficiency, and a rise in P/B ratios.

Figure 3: U.S. Household Net Worth, Total
Assets, and Debt

Figure4: U.S. Corporate (Non-Financial)
Earnings and Shareholder Returns

180 (USD Tril.)

2500

140

Liabilities(%)

Total Pay out Ratio(B+C) /A120

2000

160

Consumerdurable goodsFinancial asset

140120

100
1500

60

1000

DurablesNet Worth100

80

40500

Net Income(A)2080
0Total asset

0Dividend(B)60-20-500

Financialasset

40-40-1000
20-60

Share buy buck(C)Real estate

-1500

0-80

Liabilities
-100

-2000

-20
95 97 99 01 03 05 07 09 11 13 15 17 19 21 23
Source: FRB, Musha Research

Figure 5: Accumulated Equity Investments byU.S. Entity (from 2009)
5,000

Figure6: Capital to Total Asset Ratio ofJapanese Corporations（$ bil.）

50

4,500
4,000

45

Non-financialcorporations

3,500

40

3,000

35

2,500

302,000Households

1,500

25

1,000

20500

Foreign sector
015-500

10-1,0005-1,500-2,000US Pension funds andother institutions-2,500055 60 65 70 75 80 85 90 95 00 05 10 15 20-3,000

Suurcs:MOF,Musharesearch-3,500
09

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Source: FRB, Musha Research

What is preventing the U.S.-style virtuous cycle? 2) Extreme risk aversion
Second, because Japanese households have shied away from high-return equity investments, the benefitsof rising stock prices have not been passed on to them, and household wealth formation has lagged far

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Strategy Bulletin vol349

behind that of the United States. However, the NISA reforms and other measures are encouraging
households to take on more risk. Households' income from financial assets will increase significantly
because of stock investments.

FOMO will trigger a virtuous circle in Japan, and the Kishida administration's "new capitalism
policy" will also contribute
In this way, in Japan, as in the U.S., a trend toward the return of corporate profits to society and the creationof demand is beginning to take place, triggered by the rise in stock prices. As shown in Figures 7 and 8,
Japanese firms have been holding excessive amounts of capital, resulting in extremely low ROE (return onequity = growth rate of shareholders' equity) and the lowest P/B ratios of all major countries. This is because
corporations, like households, have been poisoned by the "Cash is King" mentality. This is where the Kishidaadministration's new capitalism policy is focusing. There is a great possibility that the U.S.-style virtuous
cycle of rising stock prices for increased wealth ➡ increased consumption ➡ economic growth ➡ risingstock prices will take root in Japan.

Figure7: ROE of Major Countries, Japan Stands
Out as Low

Figure8: P/B ratios of major economies, Japan'sstands out as low
6(x)

Japan
USFrance
Germany
UK
Italy

25
5
US
20
UK

4US

15
3
GER

FR

10

25JPN

1Japan

0
03

05

07

09

111315

17

19

21

23
094 96 98 00 02 04 06 08 10 12 14 16 18 20 22Source: Bloomberg, Musha Research© Copyright 2023 Musha Research Co., Ltd. Although the information contained herein is based on sources that Musha Research believe reliable, Musha Research do not make any representation orwarranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of the information and opinion herein. Musha Research is not responsible for any losses
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