Watching Japan's stock market tick up to its highest level in two decades is a bit like watching the "likes" accumulate from your so-called friends on a popular Facebook post. Affirmation tends to make you feel good at first, but in reality, that friendship can be shallow.
While share prices in Japan have gone up, dividends and share buybacks haven't. Of all developed economies, the nation's dividend payout ratio is the second lowest after South Korea.
What's more, companies aren't reinvesting -- suggesting that the increase in profits that has underpinned the stock rally may not be sustained. Over a five-year period, half of firms in the Topix 500 Index posted an average return on equity of 8 percent or lower, CLSA Japan strategist Nicholas Smith notes. Less than a third of S&P 500 and Stoxx Europe 600 companies fit that measure.
Money from cuts to the corporate tax rate haven't gone toward capital expenditure or raising wages, either. Leverage also remains elevated, suggesting excess cash has merely been parked on firms' balance sheets.
One real worry for investors is that the corporate governance overhaul previously promised by Abe takes a back seat to the political issues he most recently campaigned on, including combating North Korea and rewriting Japan's pacifist constitution.
Abe's ultra-easy monetary policy will probably persist, which should help keep stock prices inflated, the yen weak and exports humming along. As my colleague Shuli Ren says, equities have room to move higher.
But stocks tend to be fair-weather friends. Sooner or later investors may realize the share-price rally is built on less than solid foundations.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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