Japan, not quite ‘back’, has a new fighting chance

There was some reason for cheer among Japanese commentators on February 22. The Nikkei 225, Japan’s flagship stock index, finally reattained its previous peak from 1989:

(Note: Technically this isn’t adjusted for inflation, but since Japan hasn’t actually had much total inflation since 1989, that doesn’t make much of a difference.)

Bloomberg’s detailed breakdown shows that the rally over the past year has been driven entirely by foreign buyers. But the foreign buyers probably have the right idea — most Japanese companies still look very cheap compared to the value of their assets.

Unfortunately, a country can’t eat its stock market; Japan’s real economy is looking much more anemic. The country experienced a surprise recession in late 2023, with manufacturing and exports both looking very weak.

The country lost its spot as the world’s third-biggest economy at market exchange rates, falling behind Germany (whose economy is also pretty weak). Economists are pessimistic, predicting further economic shrinkage in early 2024.

Still, there are some reasons to be optimistic about Japan’s economy in general. First, the country is finally taking its own defense seriously — defense spending surged from 5.4 trillion yen (US$35.9 billion) in 2022 to 7.95 trillion yen ($52.5 billion) in 2024. That’s still only about 1.5% of GDP but the rapid increase is pretty stunning.

Defense spending will stimulate manufacturing, but will also give Japan the chance to build its own military-related tech industries. More fundamentally, it demonstrates that Japan’s leaders realize the magnitude of the threat China poses, and realize that they need economic growth in order to fund a more robust defense.

Second, Japan is bringing in large numbers of