For the first time in more than 15 years in Japan, the appetite for higher-risk assets such as equities is set to rise. There are three reasons for this, one cyclical and the others structural. First, the Japanese economy is on a sustainable growth path. Real wage growth is now positive, and employment is recovering as businesses use their much-improved profitability to expand.
Second, the political environment for enterprise and investment has been altered by the dramatic victory of Junichiro Koizumi in the September general election. The passage through parliament of the law enabling the privatization of the post office sets the scene for a new era of economic reform. Reformists in the ruling LDP are now in the saddle. This sets a tone for more deregulation and enterprising investment, which is great news for Japanese equities.
The generation game
The third reason will work itself out in the long term, but is probably the most important for a sustained bull market in Japanese equities – demography. Japan’s population is rapidly ageing. The post-war baby boomers are starting to retire. Already in excess of 20% of the population are more than 65 – a much higher proportion than in any other OECD country.