Ispent some of Thursday browsing in Edinburgh's Library of Mistakes, a small but brilliant library devoted to collecting books on finance. One of my favourite things about this library is that you can't access the books online, and it isn't fully indexed and catalogued you can find a book by title, but not by subject.
Anyway, yesterday my eye was caught by several books on Japan (the Library of Mistakescaters to almost all my obsessions), and in particular by Richard Katz's 1998 misery memoir of the country's economic crisis, Japan, the System that Soured: the Rise and Fall of the Japanese Miracle.
His conclusion then was stark. The challenge facing Japan after the crash was "truly daunting". Mr Katz saw it as being handicapped by the "institutional vestiges of the catch up era" a one party state, a "dysfunctional financial system", and, worst of all, a "cartelised corporate sector". To that list we have to add demographics: it is almost impossible to force fast economic growth (or much in the way of real change, for that matter) on an economy dominated by a fast-ageing population.
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So, what's changed since 1998? Until pretty recently, there would have been an easy answer to that: nothing. Now there's a trickier one: thanks to the election of Shinzo Abe in 2012, quite a lot.
Mr Abe's landslide victory was based on his promise to reinvigorate the Japanese economy with a spectacular combo of extreme monetary policy and structural reform. The effects of this could and do fill many columns, but the most interesting bit at the moment is the way in which Mr Abe's government is taking on the "cartelised corporate sector". He clearly reckons that if Japanese companies can do better, so will everyone else via higher wages, for example, or perhaps a tax-take that might eventually make a dent in Japan's hideously awful national debt.
Finally, there is the new Nikkei 400 index. If you want to be in it (and it is rather shameful not to be), you have to focus seriously on your profits and your return on equity (which is much lower in Japan than elsewhere, and one of the key reasons for the stockmarket's underperformance).
Some of this might sound horribly boring and a little over-worthy. But it all adds up to a really big and still under-appreciated deal. This is the kind of reform that can really unlock value and cash. If a company, such as secretive robot maker Fanuc, can react to it by setting up a shareholder relations department (as itdid earlier this year), it is worth investors wondering if the company might listen to their demands to have some of its $8bn cash pile returned to them. That's not boring at all. Goodbye cartelised corporatism.
Now, you might be thinking that it's all very well fiddling with return on equity targets, but there isn't anything that Mr Abe can do about the demographic problem. Quantitative easing (QE) might give you piles of money, but you can't make people have babies, and you can't print them either. I wonder. Not only are Japanese politicians seemingly more open to discussing immigration, but a note from GavKal tells us that during the "long cold nights of 2013-14 Tokyoites were not just playing shogi". The result is that the population of under-15s in the city is up by 14,000.
It is too early to get overexcited about a baby boom, but there has been a 'clear push' from the state to stop nagging women to give birth early and often, and instead to start offering practical help to those in their 30s and 40s who didn't (think fertility treatments and childcare). The rising wages Mr Abe is insisting on seeing from the companies he is shovelling QE money into can't hurt here either. Lack of financial confidence is always and everywhere the top reason people give for not having children. Print babies? Sure you can.
There might be some catching up to do in this area, but as Mr Katz noted in his book, if there is one thing the Japanese are good at, it is catching up. If they do so on this, he will be pleased: his second book Japan Phoenix: The Long Road to Economic Revival (which I am sure the Library of Mistakes would be happy to accept as a donation from anyone with a spare copy) was written in 2003. It predicted that "sustained growth of 3%, perhaps more" is once again within Japan's reach. Maybe today, it really is.
Still, it is worth remembering that all good news on economies is irrelevant to long-term investors if prices are too high or if there is no flow of money into the market. Investors in Japan appear to have little to worry about on either count. There is no shortage of money: QE in Japan is, as Socit Gnrale's Albert Edwards puts it, "off the scale". It is driving share buybacks, and hence rising prices across the market (just as it did in the US).
At the same time, Japan's GPIF (Government Pension Investment Fund) is, quite rightly, doing the opposite to pretty much every other pension fund in the world pouring money into domestic equities. And valuations are just fine. The fall in the yen has driven up profit margins and overall "Japanese stocks remain reasonably priced" on most measures, Socit Gnrale says. Mr Abe's happy talk has alongside the weak yen done wonders for the Japanese stockmarket since 2012. This year's real change could do even more.
This article was first published in the Financial Times.
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