Musha Research Commentary20August 2024

S\StrategyBulletin (No. 362)

Why High Stock Prices Can Diverge from Real-Life
Experiences and Still Be Justified～The J-Curve Effect of a Weakening Yen Leads to an Increase in Economic Volume ～The unprecedented Nikkei 225 plunge of 7,600 yen, or 20%, in three days triggeredby the Bank of Japan's interest rate hike on July 31 was followed by a sharp rise of
6,500 yen, or 20%, over the next seven days, recovering 85% of the decline. This Vshaped recovery suggests that the stock price decline was not based on
fundamentals.
But it is not surprising that people have been swept away by pessimism. This isbecause there has been trivial improvement in the living standard of the Japanesepeople. Figure 1 shows that real personal consumption expenditures peaked at ¥310
trillion in the January-March 2014 period, just before the consumption tax hike
(5➡8%) in March 2014, and have never exceeded that level in the past 10 years. It
began to recover from the ¥272 trillion in the April-June 2020 period during thepandemic, and although it rose at an annualized rate of 4.0% y-o-y in the most recentApril-June 2024 period, it remains at a level 4% lower than its peak 10 years ago.
During this period, corporate profits have increased 2.2-fold, stock market
capitalization has increased 3.3-fold, and general account tax revenues haveincreased 1.6-fold, which shows how much individual life has been left behind.

Figure1 Japan's Diverging Nominal Gross Income (GNI) and Nominal GDP
vs. Real GDP and Real Consumption:
700650500

RealGDP
Nominal GDP
NominalGNIReal Consumption

450

Net Income from abroad
Inflation added to real income600

400
550
350500300450Consumption Tax hike250

1994/3Q
1995/2Q
1996/1Q
1996/4Q
1997/3Q
1998.2Q
1999/1Q
1999/4Q
2000/3Q
2001/2Q
2002/1Q
2002/4Q
2003/4Q
2004/2Q
2005/1Q
2005/4Q
2006/3Q
2007/2Q
2008/1Q
2008/4Q
2009/3Q
201Q/2Q
2011/1Q
2011/4Q
2012/3Q
2013/2Q
2014/1Q
2014/4Q
2015/3Q
2016/2Q
2017/1Q
2017/4Q
2018/3Q
2019/2Q
2020/ 1Q
2020/4Q
2021/3Q
2022/2Q
2023/1Q
2023/4Q

400

Source: Cabinet office, Musha Research

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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, Tokyo108-0075,Japan

20August 2024

Strategy Bulletin vol362

According to the GDP statistics released on August 15 for the April-June period, total income earned by theJapanese people (nominal GNI) was 647 trillion yen, up 2.7% from 630 trillion yen in the same period lastyear and up 9.1% from 593 trillion yen in the same period two years ago, indicating a continued sharp
increase.
Why has nominal GNI grown so rapidly while real GDP has remained at 550 trillion yen for the past twoyears? First, nominal GDP expanded due to rising prices. The second reason is that the income balance
surplus from abroad has increased significantly. Since corporate profits, stock prices, and tax revenues are
all linked to nominal income, it is only logical that they are performing well.
Figure 2: GDP Deflator
1.2
1.15

0.06
0.05
GDPDflater(L)Y/Y(R)

1.1

0.04

0.03
0.02

1.05

0.01

10
-0.01

0.95

-0.02
-0.03

1994/4Q
1995/4Q
1996/4Q
1997/4Q
1998/4Q
1999/4Q
2000/4Q
2001/4Q
2002/4Q
2003/4Q
2004/4Q
2005/4Q
2006/4Q
2007/4Q
2008/4Q
2009/4Q
2010/4Q
2011/4Q
2012/4Q
2013/4Q
2014/4Q
2015/4Q
2016/4Q
2017/4Q
2018/4Q
2019/4Q
2020/4Q
2021/4Q
2022/4Q
2023/4Q

0.9

Source: Cabinet Office,Musha Research

What will happen to the gap between these strong earnings and stock prices and weak real consumption inthe future? Musha Research expects real GDP and consumption to grow at a faster rate and catch up withnominal growth.
The first reason is that Japan's economy will experience a pronounced volume boom in the second half of2024 and beyond. The weak yen has strengthened Japan's price competitiveness, and industrial production
are starting to increase. In addition, substitution of domestic production for imports, which have becomeexpensive, has begun to occur.
The weak yen has also increased inbound tourism, and foreign tourists are stimulating local domestic
demand in every corner of Japan. Global demand is concentrated through various channels toward cheap
Japan, stimulating the domestic economy. Companies' appetite for capital investment in Japan is growing
rapidly. According to DBJ (Development Bank of Japan) survey of capital investment by large corporations
in FY2024 capital investment in the manufacturing sector will increase by 24.7% and in all industries by
21.6%, the highest levels of growth ever recorded. In addition to the effect of the weak yen, the Japanese
government's support for semiconductors, totaling 4 trillion yen, is entering a critical phase, and investment
is booming in Kumamoto, Hokkaido, Kitakami, Hiroshima, and other areas. EV investment, which had been
lagging in Japan, is rising as well. Once the yen's depreciation is firmly established, companies will be more
willing to invest in the domestic market.
Second, household real incomes, which were hit in the initial stages of the J-curve effect, have begun torecover. In addition to the first significant wage growth rate of 5% in 30 years, inflation has subsided.
International inflation (due to energy prices and supply chain disruptions) since 2022 has completely ended
and the rapid depreciation of the yen has almost run its course.
In accordance with GDP deflator falling to 3.0% in April-June 2024 after rising to 5% y/y in January-March2023 real employment compensation rose 0.8% y/y in April-June 2024, the first growth in 11 quarters sinceJuly-September 2021. Household consumption is likely to gain strength.

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Strategy Bulletin vol362

20August 2024

Figure 3 J-Curve Effect

What Japan is experiencing today is a typical J-curve effect, in which the initial phase of the yen's
depreciation has the negative effect of depriving the economy of real income due to higher import prices,
but once this has run its course, the yen's depreciation makes the economy more competitive, leading to anincrease in production volume, which in turn continues to boost economic growth.
Japan’s relative strength will continue, as real GDP grew at an annualized rate of 3.1% in the April-June2024 period, the highest among the G7 countries.

Figure4: Trends in Key Indicators Since Abenomics© 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 lossesor damages incurred by your relying on such information and opinion. The analyses or opinions contained herein may be based on assumptions that if altered can change the analyses or opinion expressed.
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