Currently, the market is highly concerned about the contraction of the balance sheet. Japan, in the last century, presented a perfect case of deflation over a period of thirty years: the contraction of the balance sheet resulted in persistent low inflation in the real economy.
In 1989, the bubble economy behind the prosperity burst. The following year, the Nikkei index plummeted from its year-high of 38,713 points to 23,849 points, a decline of 38.4%. The Tokyo housing price index dropped from 324.8 points at the beginning of 1990 to 134.6 points at the end of 1999, a decline of 58.6%. The once rapidly growing Japanese economy entered a period of stagnation, which is also known as the &#34;Lost Decades.&#34;
Recently, the market has been highly concerned about Japan and its &#34;Lost Decades,&#34; and many market studies have begun to focus on the various experiences Japan went through during the contraction of its balance sheet. In a report on July 4th, Minsheng Macro pointed out that to understand the Japanese issue, we should not only focus on Japan domestically.
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Since the 1960s, Japan has actively laid out its industrial chain overseas. Japan's global industrial layout beyond its borders requires our full attention. Only by fully understanding the &#34;shadow&#34; of Japan's overseas production can we objectively evaluate what Japan has experienced during the &#34;Lost Decades.&#34;
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<h2>Policies Encouraging Japanese Capital to Go Overseas After the Burst of the Bubble</h2>
After the bursting of the bubble, domestic demand in Japan remained weak. According to Minsheng Macro:
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After the signing of the &#34;Plaza Accord&#34; in 1985, the sharp appreciation of the yen severely hit Japan's &#34;export-oriented&#34; economy. In response to the decline in GDP growth caused by the obstruction of exports, expansionary fiscal policies and loose monetary policies were successively introduced.
Abundant liquidity boosted the Japanese stock market and real estate to an abnormal prosperity. The total market value of the Japanese stock market surpassed that of the United States in 1987, ranking first in the world. Tokyo's commercial land prices quadrupled in a decade. Starting from 1989, the tightening of monetary and fiscal policies burst the bubble behind the prosperity.
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Since then, Japan's economic growth has stagnated, prices have fallen, and Japan has fallen into deflation. In order to save the collapsing economy, the Japanese government continuously expanded public investment and the central bank implemented quantitative easing policies. However, the stimulus policies were no longer able to reverse the economic downturn, and Japan entered an era of deflation domestically.
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Zhou Junzhi, an analyst at Minsheng Macro, pointed out:
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With reduced domestic investment opportunities and narrow profit margins for companies, many enterprises have turned to overseas markets to seek investment opportunities.
Since the 1990s, there has been a significant gap between overseas equipment investment by companies and domestic equipment investment.
According to data released by the Japanese Cabinet Office, while overseas equipment investment by enterprises has grown rapidly since the year 2000, domestic equipment investment has stagnated, creating a sharp contrast.
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As a result, the Japanese government encouraged companies to expand overseas, signing the &#34;Plaza Accord&#34; and launching the &#34;yen carry trade&#34; plan, marking a turning point in Japan's foreign investment. Japan shifted from being a &#34;trading nation&#34; to an &#34;investment nation.&#34; Minsheng Macro pointed out:
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The core of the &#34;yen carry trade&#34; plan is large-scale foreign direct investment, which not only ensures the return of trade surplus funds (yen carry trade), but also allows Japan to obtain higher investment returns, expand foreign markets, and acquire more resources and technology.
The implementation of this plan marked the beginning of large-scale foreign direct investment by Japanese companies, and Japan's economy embarked on a development path dominated by foreign investment and multinational corporations.
Japan made massive investments in developing countries in East Asia and Southeast Asia, establishing a large number of industrial bases and forming a global production network for Japanese companies. The return on investment flowed back to Japan, creating a cycle of funds that provided strong support for the sustained development of the Japanese economy.
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<h2>The Importance of Japanese Companies' Overseas Assets and Income</h2>
Minsheng Macro pointed out that whether it is macroeconomic or microenterprise operations, Japanese companies' overseas investment plays an extremely important role. The importance of Japanese overseas investment can be observed through six sets of data:
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First, from 1996 to 2022, Japan's foreign investment has increased eightfold, and the stock of Japan's foreign investment accounts for nearly 50% of Japan's GDP in 2022;
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Second, the gap between Japan's GNI and GDP is widening, with overseas income currently accounting for about 10% of GDP. Similar countries with a gap between GNI and GDP include Germany;
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Third, in 2021, Japan's overseas net asset scale accounted for approximately 75% of GDP, triple the amount in 1996;
Fourth, in the 1997 fiscal year, the proportion of overseas subsidiary revenue to total company revenue was 37.5%. By the 2020 fiscal year, overseas subsidiary revenue had reached 69.3% of total company revenue, nearly doubling the proportion.
Japanese companies' overseas market strategies have proven effective and have become a new engine for domestic business development.
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Furthermore, in the early stages, overseas investments were primarily carried out by large and medium-sized enterprises. However, in recent years, small and medium-sized enterprises have rapidly expanded, becoming a new growth point. In 2000, companies with a scale of less than 1 billion yen accounted for 43.4% of the total number of outbound enterprises. By 2020, this proportion had risen to 76.5%.
Over time, non-manufacturing companies in Japan have also made significant investments overseas. After the financial crisis in 2008, non-manufacturing industries surpassed manufacturing industries in terms of foreign investment. Among them, the financial and insurance sectors led the way, relying on the yen as an international currency and exerting influence in the global financial market.
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In addition, Minsheng Macro pointed out that in the early stages, Japanese foreign investments had two main destinations: low-cost and resource-rich Asia, and the United States with a huge domestic demand market. However, over time, the regional distribution of Japanese foreign investments has become more diversified.
Since 2000, influenced by changes in the international political and economic landscape, Japan's investment in Europe has increased significantly, surpassing the United States and becoming the primary destination for Japanese foreign investment.
<h2>Overseas economic expansion helps Japan weather deflationary period</h2>
Minsheng Macro summarized:
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Faced with weak domestic economic growth and shrinking market demand, Japanese companies turned their attention overseas, actively seeking opportunities in foreign markets. Core industries such as automobiles and electronics were the first to expand overseas, establishing production bases and industrial chains, thus creating their global competitive advantage.
Subsequently, small and medium-sized enterprises also benefited from globalization. They followed the lead of core companies and entered the downstream of the industrial chain, becoming suppliers and supporting enterprises for the core companies. By seizing opportunities in overseas markets, they mitigated the negative impact of shrinking domestic demand.
Overseas revenue far exceeds domestic revenue, effectively offsetting the risk of business closures and rising unemployment rates caused by domestic deflation. This is crucial for ensuring employment and business development in Japan.
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The expansion of overseas economies has helped Japan weather the deflationary period and is putting an end to Japan's &#34;lost three decades&#34;.
Since the beginning of this year, the Nikkei Index has broken through the 32,000-point mark, repeatedly reaching new highs in the past three decades. The nominal GDP for the first quarter, calculated on an annual basis, reached a record high of 570 trillion yen. It seems that the Japanese economy is bidding farewell to the &#34;lost three decades&#34;.

民生宏观 pointed out that Japanese companies' overseas income far exceeds domestic income, which to a large extent offsets the risks of business closures and rising unemployment rates caused by domestic deflation. This is the key to ensuring employment and business development in Japan.

Setting Sail! The Overlooked "Lost Three Decades" Japanese Strategy