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Anthony Rowley

What if Wall Street stock prices were to collapse from their current pinnacles under the sheer weight of excessive investment in artificial intelligence (AI)? Would markets in Tokyo and other Asian centres – not to mention Europe and beyond – follow suit?
These are questions that are likely to be put to the test before long if US stock prices continue their strong upward trajectory, interest rates and inflation keep rising and, as seems likely, the US-Israel war against Iran drags on.
What a sharp correction or crash on Wall Street might reveal is how far equity culture has become structurally embedded into economic systems in Asia and beyond. Japan could well emerge as an exemplar in this regard.
At first glance, Japan might appear to be an unlikely candidate. The sheer size of household savings at around 2.3 quadrillion yen (US$14.2 trillion) and the fact that they were long hidden under the mattress or kept in savings deposits became legendary and hardly suggestive of capital market strength. Japan also has a reputation among foreign investors for its cross-shareholdings, wherein a dense web of mutual ties among major corporations and between them and their suppliers, bankers or insurers serves as a defence against foreign penetration and influence.
The reality is different now. Behind the scenes, successive Japanese governments have spent several decades building a financial infrastructure that is more capable of absorbing the nation’s vast domestic savings and foreign capital flows into the economy.
According to Hiromi Yamaji, CEO of Japan Exchange Group, cross-shareholdings have been reduced to the point where they represent less than 10 per cent of total listings on the Tokyo Stock Exchange, compared to over 50 per cent in the 1980s. Yamaji made the remark during a press conference on Japan’s stock market revival held at the Foreign Correspondents’ Club of Japan in Tokyo on July 14.

Japan’s approach to building financial infrastructure is an example that other Asian economies could usefully follow in many respects. Its message is that these things cannot be left mainly to the market, as has tended to be the case in those economies that were seduced by the “emerging markets” narrative that emerged from the 1980s onwards.
There is little point in encouraging investment into stock markets – in particular the equity market – unless the domestic corporate sector is capable of deploying funds in a constructive and productive manner, one which benefits society as a whole rather than just outside investors.
This is where the Japanese example stands out as one that could be worth copying elsewhere in Asia and beyond. Many emerging economies simply opened their doors to foreign portfolio investment with scant regard for how the investment was deployed and how financial and other resources could be accessed – and, in some cases, exploited – by foreign equity investors.
In contrast, Japan emphasised the need for good and transparent corporate governance in the interests of both domestic and foreign investors. This included the need for outside directors on company boards who could help monitor how investment in those companies was deployed.

Japan’s tax-favoured Nippon Individual Savings Account (NISA) scheme was launched in 2014 to collect individual savings and channel them into a broad spectrum of companies in a systematic manner that avoided speculative behaviour in the stock market.
What does all this have to do with the resilience of the Japanese stock market to downturns or even collapses in markets that face multiple threats of late? It means that, despite the fact that foreigners account for a dominant share of daily trading in Japanese stocks, domestic share ownership has become much more widespread and equity culture has become more embedded among Japanese, especially younger people.
Thus, any bursting of the AI bubble on Wall Street and consequent collapse of US share prices, in particular on the tech-heavy Nasdaq, would not necessarily cross the Pacific Ocean to Japan, as has been the case in previous boom and bust cycles.

If Japan’s approach to capital market development in recent years can be faulted in any respect, it is in the narrow and highly institutionalised Japanese government bond (JGB) market. Successive Japanese governments have relied heavily on the issuance of JGBs to fund their steadily mounting deficits. This debt pile has grown to the point where the public debt to GDP ratio has topped 200 per cent, by far the highest among economically advanced nations.
This has been made possible largely because a compliant Bank of Japan (BOJ) was prepared to absorb a hefty chunk of government debt issuance. The gargantuan Government Pension Investment Fund (GPIF) has also shared the burden of public debt absorption. However, this is changing as a BOJ determined to assert its independence is set upon reducing the size of its balance sheet while the GPIF appears to be resistant to Prime Minister Sanae Takaichi’s spending ambitions.
The NISA is likely to step in and absorb more JGBs, even if the BOJ continues to go slow on raising interest rates to make government debt more attractive on income grounds. The resulting wider public ownership of JGBs should help remedy this remaining weak spot in Japanese capital market development and incentivise more Asian nations to do things the Japanese way.


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Why Japan should be able to weather a US market crash

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Opinion

Asia Opinion

News

Asia

East Asia

Successive Japanese governments have spent decades building financial infrastructure that other Asian countries can emulate


Successive Japanese governments have spent decades building financial infrastructure that other Asian countries can emulate.


Stocks

Macroscope

United States

Sanae Takaichi

Bank of Japan

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Why Japan should be able to weather a US market crash

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Successive Japanese governments have spent decades building financial infrastructure that other Asian countries can emulate

Successive Japanese governments have spent decades building financial infrastructure that other Asian countries can emulate