When I first went to Japan in 1987, the economy was flying, the grounds of the Imperial Palace were estimated to be worth more than the whole of California and everything from making a phone call to buying a coffee was eye-wateringly expensive.
Back in Tokyo for a family holiday in August almost everything was familiar with one exception. The people were still welcoming, the food magnificent, the trains as clean and punctual as ever – but it felt really cheap.
A generation of deflation and an economic programme – Abenomics – with an explicit aim of weakening the currency have made Japan a fantastic place to visit and the main tourist sites in Kyoto were overrun with visitors, very largely from China. For most of the past 25 years, however, Japan’s economic woes have made it a dreadful investment destination.
Last week we had a reminder that Japanese share prices can rise as well as fall. The 7.7pc jump in the Nikkei index on Wednesday was the biggest one-day rise since 2008 and the eighth largest since at least 1970.
Ironically, the size of the leap was actually a reflection of persistent scepticism about the Japanese stock market. The rise was so dramatic because investors who had bet on falls in the Nikkei (short-sellers) were forced to buy shares to cover their negative positions once shares began to turn higher.
Record levels of these short positions reflect a concern that the rally in the Japanese stock market since the election of prime minister Shinzo Abe in 2012 may have been too much too soon. The enthusiasm which greeted the reform-minded premier three years ago has waned recently as Japan’s economy has stalled in the face of a slowdown in China.
Sceptics have started to believe that the structural reforms needed to build on the early successes of monetary and fiscal stimulus may fail to materialise.
Last week, economic growth in the second quarter was revised higher but remained in negative territory and a reliance on inventory growth in the figures does not augur well for growth in the rest of 2015.
Japan’s economy minister last week said an unexpected tax windfall should be spent boosting the flagging economy rather than paying down Japan’s sky-high debts.
Many people now expect the Bank of Japan to be forced to inject yet more liquidity in the autumn.
The key to Japan’s future lies not in stimulus, however, but in the so-called third arrow of structural reforms. Two and a half years after Mr Abe took office promising to raise Japan’s growth rate to 2pc a year, the economy is still hardly bigger than in 2012. The International Monetary Fund called this summer for Abenomics to be “reloaded”. Nobel laureate Paul Krugman said he was “really worried” that the programme would fail.
The scorecard is certainly mixed. Japan has made some progress in opening up its pampered agricultural sector to competition, it is cutting corporate taxes and is getting more women into the workforce.
Stock market investors are rightly excited about the improvements in corporate governance, which are making Japanese companies much more shareholder-focused than they have been. But on key issues like immigration there is little progress.
Without a more open-doors policy to overseas workers, Japan will fall victim to the relentless logic of demographics. Outside of the still vibrant capital, the number of old people and the empty houses left by a fast-shrinking population are what struck this visitor.
So Japan has not solved its long-term problems and Abenomics remains a work in progress. The key-man risk of the programme is hinted at by its name – Mr Abe’s vision of a regionally relevant Japan that can hold its own against its giant neighbour is dependent on the man himself retaining public support. His approval ratings have suffered recently on the back of unpopular and controversial legislation to water down Japan’s pacifist constitution.
But the stabilisation of Japan’s stock market since 2012 is built on more secure foundations than these worries might suggest.
In advanced industries such as medical devices, robotics and high-performance materials the country has an impressive lead. Japan spends more heavily on research and development than anywhere other than South Korea.
Corporate earnings continue to grow, valuations are low and, above all, sentiment towards the Nikkei remains weak. Japan has fallen off the radar both as a place to visit and to invest. That’s wrong on both counts.
