Home > Opinion > Columns

Japan’s stock market hits record highs, driven by rising GDP

Published: 22 Sep. 2025, 00:03

Kim Young-ik

The author is a former adjunct professor of economics at Sogang University Graduate School of Business.

Japan’s major stock indexes have reached record highs this year. Many analysts credit Tokyo’s recent shareholder-friendly reforms, but the deeper force behind the rally is a clear rise in nominal GDP as the economy has shaken off deflation. The lesson is direct: for Korea to reach the era of “Kospi 5000,” it must raise economic growth alongside enhancing shareholder value.

After the collapse of its asset bubble in the early 1990s, Japan entered its so-called “lost decades,” characterized by low growth, low inflation, and low interest rates. During that period, companies drastically reduced their investments. By 1998, Japanese firms had shifted to becoming net savers, placing more funds in banks than they borrowed. Corporate financial surpluses reached 10.4 percent of GDP by 2003, compared to 5.4 percent in 1998. Although that ratio has since declined, companies remain net lenders rather than borrowers.

A passerby walks past a stock market indicator board in Tokyo on Sept. 18. The Tokyo stock market soared following the U.S. Federal Reserve's decision to cut interest rates. The Nikkei Stock Average gained 513.05 points to close at 45,303.43, surpassing the 45,000 mark for the first time. [EPA/YONHAP]

Households also save more than they borrow. With both households and companies piling up savings, bank lending inevitably shrank. Japan’s major banks responded by investing heavily in securities, primarily government bonds. The share of bonds in bank assets jumped from 11.6 percent in 1997 to 32.4 percent by 2011.

To support growth, the government issued large volumes of bonds, which banks readily bought. Yields on 10-year government bonds sank into the 0-percent range. Typically, lower interest rates boost stocks. Yet between 1990 and 2010, both interest rates and equities fell. The decline in growth overpowered any boost from lower borrowing costs, and corporate payout ratios remained low, ranging from 15 to 20 percent.

A shift came after 2014, when Tokyo introduced policies to strengthen shareholder value. The Stewardship Code, launched in 2014, encouraged institutional investors to push for better governance and dividend policies. The following year, the Corporate Governance Code urged companies to increase the share of independent directors. These moves prompted firms to adopt more transparent and investor-friendly practices.

More recently, companies listed on the Tokyo Stock Exchange (TSE) have accelerated share buybacks, dividends, restructuring and investment in growth industries. Japanese corporations, once notorious for hoarding cash, now focus on returning profits to investors.

Lee Jae Myung, presidential candidate of the Democratic Party, holds a placard reading “Kospi 5000 Era” during an economic recovery performance at the Express Bus Terminal Plaza in Seocho District, southern Seoul, on May 29, the first day of early voting for the 21st presidential election. [YONHAP]

The change is striking. For fiscal 2024 (April 2024 — March 2025), Topix-listed firms announced buybacks worth 18.7 trillion yen ($126 billion), an 85 percent increase from the previous year and the highest on record. From April through mid-August this year alone, buyback announcements totaled 10.5 trillion yen. Dividend payouts are also rising. The average payout ratio of Topix companies reached 35.6 percent in fiscal 2024, up from an average of 33.8 percent in the previous three years. Total shareholder return, including dividends and buybacks, now equals 57 percent of net profits, up from 44.7 percent.

The government and TSE continue to pressure companies to improve capital efficiency, and global investors are taking notice. Japanese firms, once seen as stingy, are now portrayed as eager to share profits with shareholders. At the same time, the number of delistings is rising sharply. Already, 79 companies have delisted or announced plans to delist this year, likely surpassing last year’s total of 94. Some firms have responded to pressure by boosting payouts, but others prefer to delist to avoid scrutiny and preserve long-term control.

While these shareholder policies have reshaped corporate behavior, the fundamental driver of rising stock prices has been the end of deflation and a rebound in nominal GDP. Japan’s GDP deflator, a broad price measure, fell 15.7 percent between 1994 and 2013, leaving nominal GDP nearly flat for two decades.

The trend reversed after 2015, helped by “Abenomics,” the economic strategy of former Prime Minister Shinzo Abe. The Bank of Japan launched a massive monetary easing program, targeting a 2 percent inflation rate through quantitative and qualitative measures. Negative interest rates followed in 2016, and the yen depreciated significantly. From 86.75 yen per dollar in late 2012, the exchange rate slid to 160.88 by mid-2024. Rising prices lifted the GDP deflator 16.8 percent between 2013 and mid-2024, while nominal GDP grew nearly 24 percent.

The Nikkei 225 index is most strongly correlated with nominal GDP, with a correlation coefficient of 0.87 between 1994 and mid-2025. The yen-dollar exchange rate also matters, with a correlation of 0.66 over the same period. Together, stronger nominal growth and yen weakness have fueled the market’s climb.

Korea is adopting similar shareholder policies. The Democratic Party recently launched a “Kospi 5000 Committee,” pledging to reform corporate governance, boost transparency and win back investor confidence. Korea’s market has long suffered from a “Korea discount” due to low dividends, opaque governance and recurring scandals. The committee’s agenda includes amending the Commercial Act to strengthen director accountability, reforming disclosure rules, tightening sanctions on unfair trading, revising tax rules to encourage share cancellations, and restoring investor trust by cracking down on stock manipulation.

In this image from a video, Japan’s former Prime Minister Shinzo Abe makes a campaign speech in Nara, western Japan shortly before he was shot Friday, July 8, 2022. Abe was shot during the speech and was airlifted to a hospital but he was not breathing and his heart had stopped, officials said. [KYODO/YONHAP]

These reforms have already helped push the Kospi to record highs. But as Japan’s case shows, governance changes alone cannot propel the market to its next stage. Sustained growth in nominal GDP is essential. In Korea, nominal GDP rose an average of 5.9 percent annually from 2000 to 2024, while the Kospi climbed 6.7 percent. Looking ahead, nominal GDP growth is expected to slow to around 3.8 percent annually over the next five years. That would limit annual Kospi growth to about 5 percent, making the Kospi 5000 difficult to achieve.

Since the 1970s, Korea’s growth rate has tended to fall with each change of government. The current administration aims for “real growth,” seeking to boost potential growth, now below 2 percent, back toward 3 percent. If successful, nominal GDP growth could reach 5 percent, opening the way to the Kospi 5000. True growth is the only foundation for a true Kospi 5000 era.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.