Published in Japan Forward in September 25 2025
It took a long time, but we got there in there in the end. In August 2025, Japan’s Topix stock market index finally rose above its previous all-time high. That was registered 35 years and eight months ago, on the last trading day of 1989.
Admittedly, the better-known Nikkei has already reached new ground over a year ago, but that index, like America’s Dow Jones, is a simple average of stock prices with no reference to market capitalization. Thus, a company with a high stock price such as Fast Retailing (“Uniqlo”) can have a much bigger impact on this index than a true behemoth like Toyota. In short, Topix is more comprehensive, less volatile and provides a truer picture of the Japanese stock market. In reality, only now has a new high been confirmed.
At the turn of the century, finance academic Elroy Dimson wrote an influential book called “Triumph of the Optimists”. He and his co-authors went through 101 years of data covering 16 countries and came to the conclusion that stock market investment pays off despite the risks. The bursting of Japan’s late 80s bubble put that theory to the test.
It was not just the scale of the collapse, though the decline in the Topix from peak to trough of 80% was astounding. Nor the fact that land prices followed a similar trajectory, thereby ensuring a severe banking crisis, as most loans were collateralized on real estate. No, the standout feature of the Great Japanese Bear Market was simply how long it dragged on.
Whereas the Wall Street Crash of 1929 bottomed out in 1932 and the Dow Jones ascended to a new high in 1954, Japan’s Topix Index was still making new lows in 2012, more than two decades after the slump had started. Such was the negativity that one well-respected strategist suggested that the Japanese stock market should be shut down until conditions improved.
Mild but chronic deflation took hold, for the first time in the post-war world, disincentivising risk-taking and encouraging the hoarding of cash by individuals and businesses. Prices and wages slowly eroded. Nothing seemed to change except everyone got older. Bizarrely, the Bank of Japan refused to ease monetary policy, which meant that the depressed Japanese economy had to deal with a super-strong currency. In 2012, the yen reached a record high of 76 to the US dollar.
The human damage was significant. In a few years, the number of suicides jumped by more than 50%, with middle-aged males bearing the brunt. Even blue-chip companies ceased hiring, and young graduates confronted a “recruitment ice age” that for some unfortunates proved to be semi-permanent. Japan was still Japan – there was no populist backlash or civil disorder – but there was a worrying paralysis amongst the elites. From the start of the bear market in 1990 to the second coming of the Shinzo Abe in 2012, the post of Japanese prime minister changed 15 times, with the shortest spell in office a mere 64 days!
The contrast with China, which was consistently reporting double digit GDP growth, was impossible to ignore. It was during the Clinton administrations that the phrase “Japan passing” was coined. The meaning was that it was no longer necessary for presidents and other high officials to visit Japan on their Far East tours. George W. Bush and Barak Obama had little time for Japan too and took a naively benign view of China’s increasingly assertive behaviour. In 2012, Japan hands at America’s Center for Strategic Studies issued a report stating that Japan was on the way to becoming “a tier-two nation.” In other words, the long decades of back-breaking sacrifice in pursuit of modernization were about to end in failure.
As the saying goes, the darkest hours come just before the dawn. Japan was not suffering from a terminal disease but a lack of leadership and direction as companies and institutions attempted to do the impossible – pretend that nothing had changed since the bubble era. It was, perhaps, something like the years leading up to the Meiji Restoration of 1868. Then too confusion reigned, and factional strife was intense. In the end, though, there was only one way to go – and when that was clear, nearly everyone climbed aboard.
Japan was lucky in having the right man in the right place at the right time. Shinzo Abe benefitted from the failure of his first, short-lived spell as prime minister and used the subsequent downtime to reflect deeply on what became known as Japan’s “lost decades”. He had been a standard cultural conservative but now realised that could never suffice, given the manifold challenges he faced. Instead, he followed the “di Lampedusa strategy”, named after the Italian novelist who came up with this classic line: “if we want things to stay the same, everything must change.”
Abe’s project was super-ambitious and multifaceted, taking in unorthodox monetary policy, greatly increasing the number of foreign workers, the creation of a badly needed National Security Council, encouraging more women to join the workforce, turning the world’s largest public pension fund from dozy backwater to highly professional institution and creating the geopolitical concept of a “free and open Indo-Pacific”, which brought India into the picture as a counter to China.
Early in his premiership, Abe made a riposte to the American think-tankers. “Japan is not, and will never be, a tier-two country,” he declared. “I am back, and so shall Japan be.”
Political leaders rarely comment on the movements of stock markets, for good reason. In 2013, he visited Wall Street, rang the bell for the start of trading and urged the crowd of traders to “buy my Abenomics”. He could afford to take the risk because if the Japanese stock market stayed in the doldrums, his entire project would have failed, and he would have added to the list of forgettable short-term PMs.
As we know now, Abe’s confidence was fully rewarded. Since he became Prime Minister for the second time, the Topix Index has generated a total return of 413%! Even so, the valuations for most stocks are far from stretched.
Abe was forced to resign in 2020 due to illness and was murdered in 2023 by a ne’er-do-well. Apparently, he was well aware of the possibility of assassination. There is nobody of equivalent stature on the horizon today but that may matter less than before, at least in relation to financial matters. Abe got the ball rolling in terms of reforming the responsibilities of listed companies and institutional investors, and since then many more changes have taken place as the economic ministries and the Tokyo Stock Exchange itself have used various kinds of tough love to improve company performance.
Again, there are parallels with the Meiji Restoration when the groups most dedicated to “throwing out the barbarians and honouring the Emperor” suddenly did a volte face and decided to let the westerners in and learn their tricks. So now Japan is open to hostile take-overs and huge private equity deals. If foreigners cash in, that is a side-effect. The main purpose is A) to make Japanese stocks as investable as possible in an era in which government largesse cannot be relied on, and B) to promote amalgamation of sub-scale companies, by hostile takeover, if necessary.
True, hostile bids were frowned on from the 1960s onward and the system of interlocking shareholdings protected managements from outsiders – including stockholders dissatisfied with the microscopic dividends. But in earlier years there had been plenty of hostile action in the Japanese markets. Indeed, modern-day Shibuya owes its existence to two legendary raiders, Keita Goto of the Tokyu Group and Yasuhiro Tsutsumi of the Seibu Group. These men were not angels – Tsutsumi is said to have had over 100 offspring – but what urban legacy they left behind! Now that the cross-holdings system has been radically shrunk, there is space for a new breed of conglomerateurs.
They say that imitation is the highest form of flattery. If so, South Korea has paid Japan a handsome compliment. The Korean “Value Up” scheme, which is explicitly based on the Japanese reforms, has propelled the previously becalmed KOSPI index into a turbo-charged bull market. Other Asian countries are considering following suit.
Japan as a stock market innovator is an unfamiliar concept, but it is often the case that moribund narratives refuse to die, despite the evidence. By 1992, Japanese stocks were down 55%, signalling tough times ahead but the newly elected President Clinton convened a conference of American Japanologists to deal with the burning issue of the day – how to contain Japanese industrial might. Perhaps now we have the reverse situation – the stock market is signalling good things ahead, but few believe it.
Furthermore, there is no reason for Japanese stocks not to do well in the long-term. Many investors have outsized weightings in American stocks as a consequence of the remarkably long-lived “tech” bull market. But, as “Triumph of the Optimists” attests, diversification works. And Japan still has the second largest national stock market in the developed world, making it a natural candidate for switching.
Meanwhile, the tourist boom – kicked off by the Abe administration a decade ago – has reached colossal proportions, to the extent that “overtourism” has become a problem. Rather than “Japan passing”, it feels as if the whole world wants to come to Japan – partly because the country is looking a lot better and partly because many other places are looking a lot worse.
Given the demographics, Japan’s fate is to become more cosmopolitan – as was the case in the early twentieth century. Fortunately, the authorities have the time to study the mistakes made in immigration policy by the European countries, some of which are now experiencing destabilizing backlashes.
The great Lee Kuan Yew once observed that Japan and China had never in history been strong at the same time. Now it is happening. Japan does not have the scale and power of China, but neither did it in the eighth century. Nonetheless, it preserved its independence and refused to enter the Sinosphere. In today’s world, Japan’s role is to be the antithesis of China – a democratic country brimming with soft power but wielding an increasing amount of hard power too, as well as a web of alliances, including developing and rich nations.
For the challenges to come, it will need its mojo in full working order.
