Japan's stagflation and its impact on stock prices

Good evening, this is Gen Yamashita.



The current global economy is

continuing for about two years

since the measures against COVID-19

and the substantial monetary easing

began to ease,

with vaccination largely completed,

and in 2022

major economies, led by the United States,



have started raising policy interest rates.

Amidst such a situation, in late February

Russia invaded Ukraine,

causing crude oil, grains,

rare metals and other commodities to surge,

and inflation, which had been running hot,



has risen further.

On the other hand, the Bank of Japan

has signaled that it will continue



its monetary easing policy.

Although deflation has been spoken of

for 20 years,

Japan has not been able to escape deflation,

and globally it is said to have fallen into

a state of “stagflation.”

This is what some say.



As I mentioned at the end of last week's newsletter,

this time, not only in stock investing

but also in everyday life, we will discuss

“stagflation”

and

“the impact of stagflation on the financial markets.”

I would like to explain.



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What is stagflation?

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Stagflation is a portmanteau of

“stagnation” (停滞) and

“inflation” (物価上昇).

It is the combination of

an economy in stagnation with rising prices,

i.e., an increasing inflation rate.



This occurs when the inflation rate rises

even though the economy is not growing

and that due to shortages of goods,

raw material prices rise,

ultimately causing prices to go up.







During a recession, deflationary pressures

tend to intensify,

but when wage growth is not expected,

the prices of essentials and other goods rise,

making daily life in that country harder

and everyone feels the recession.



In an economical environment

this can be said to be the worst state.



In the past, global stagflation occurred during oil shocks

and other times,

but nowadays governments and central banks

have policies designed to avoid

stagflation,

so it is said to be difficult for it to actually occur.







In such a situation,

why is Japan particularly prone to stagflation?





Next, I will explain the causes of Japan falling into stagflation.





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Causes of Japan's stagflation

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A national economy is healthy when the government, central bank, and enterprises

balance them well to achieve

sound growth.





In Japan,

the flow of the economy changed after the Plaza Accord,

but thereafter

the issues with the Bank of Japan's response after the bubble collapse,

and government economic policy directions,

and companies hoarding profits after the Lehman Shock

and stopped returning to workers,

are considered to be multiple factors.









In any case

Japan has lost international competitiveness,

and the world is moving from “manufacturing”

to “internet,”

and Japan is far behind in this transition.









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Impact of stagflation on financial markets

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Finally, I will explain the impact of stagflation on financial markets.







To state the conclusion first,

in countries where stagflation is occurring,

stock prices generally trend downward.







Earlier this year in March,

when concerns about stagflation arose,

the major stock indices in the United States

fell by as much as 3% in one day.



Also, in the Japanese stock market,

foreign investors who have been highly influential

may refrain from investing in Japanese stocks,

so this is something to watch for as well.







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Conclusion

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Japan today faces a high risk of stagflation.







On the other hand, another important fundamental factor is

the rapid depreciation of the yen.





Because the automotive industry is globally renowned,

many people may view Japan as a trade-driven country,

but in reality Japan's exports as a share of GDP

and per-capita exports are among the lowest

of advanced nations.









Thus, Japan is a country that relies on domestic demand,

but a rapid yen depreciation

leads to a surge in raw material prices.









Naturally, for a country that relies on imports,

the impact is significant, and this should come as no surprise.





Therefore, in the next newsletter,

I will discuss the impact of the currency market on Japan's stock market.

I will explain this in detail.





With that, thank you for reading until the end today.

Shitam Kenzo








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