23 April 2026 (pre-recorded 16 April 2026)
Please be aware that the accuracy of artificial intelligence-generated transcripts, such as those utilised in our interviews, may fluctuate based on factors like audio quality, subject matter complexity, and individual speaker enunciation. Consequently, these transcripts are unlikely to achieve 100% accuracy. However, it is important to note that, at FundCalibre, we do not consider the correction of automatically-generated captions to be an effective or proportionate use of resources.
Given the inherent limitations of machine-generated transcription, we strongly advise against relying solely on this transcript when consuming our content. Instead, we encourage you to use the transcript in conjunction with the accompanying interview to ensure a more comprehensive and accurate understanding of the topic.
Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening.
[INTRODUCTION]
Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we’re turning our attention to the new and improved Japan from mid-caps and AI to robotics and overlooked opportunities.
I’m Staci West, and today I’m joined by Alison Henry, investment specialist for Japanese equities at Baillie Gifford. Alison, thank you for joining me today.
Alison Henry (AH): Good morning Staci. Pleasure to be here.
[INTERVIEW]
SW: Now, when we were first discussing this interview, I had just recently watched a interview where you had said that the drivers of Japan are changing. And so I just wanted to start there because it kind of sparked today’s interview, if you like. So what do you mean by that and what’s maybe a simple example that you can use to illustrate this change?
AH: Yeah, absolutely. So the drivers of return are changing and for us as growth investors, so for the Japanese fund, I think three tailwinds matter. So when we think about Japan and the new backdrop, deflation is finally over after 30 years. It’s been a long time, but we’re now seeing prices increase and nominal wage growth is now at an all time high. And this matters because it supports consumption and that supports profitability for companies and gives them the confidence to raise wages or raise prices. So an example would be Tokyo Metro, which we have in the portfolio. It’s successfully raised its prices for the first time in 30 years. And we bought the stock at IPO at the end of last year. So that was the first one. Inflation essentially.
The second is Japan’s cash hoarding culture is changing and in an inflationary world, holding cash is of course now costly and that means it’s a powerful or there is a powerful incentive for capital to move into equities. And it’s a similar picture for corporates. So the corporate governance reforms are really pushing companies to reduce their huge cash piles and put their balance sheets to work. But that inflation aspect is meaning that actually, this is sort of a double incentive, if you like. So that was the second one. Attitudes to cash.
And then third is valuations. So valuations are still very attractive. And so for us when we are thinking about it, Japan is continuing to trade at a discount relative to its European or US peers, yet you’re still getting strong earnings growth. So put together, we think all of that is is a powerful setup for a major reappraisal of Japanese equities and we think that’s gonna be very beneficial for growth focused investors.
SW: And now I mentioned the new and improved Japan. So what actually has changed over the past decade to make it more attractive?
AH: Yeah, yeah, I think that’s a good question. So we’ve talked a bit about the inflationary environment. So first time we’ve seen inflation in 30 years, but it’s not just that. So the Bank of Japan has also been successfully raising interest rates. And so they started that in 2024. And that was after 17 years of no hikes. I have these big stats, but I feel like it is just very pronounced that we are seeing this big change in Japan. So interest rates are now at 0.75%. And that might not sound high to you and me, but 10 years ago they were negative. So this is huge progress for Japan.
And then I touched on it a little bit earlier, but the corporate governance backdrop is also very helpful. So the main areas I’ve talked about reducing cash, but there’s also companies that are unwinding cross holdings and buybacks are a good way for companies to be boosting their EPS, their earnings per share. So just a few examples in the Japanese fund, we’ve got Shimano. I was actually in Tokyo two weeks ago with one of the investment managers and we met with one of the non-executive directors at Shimano to discuss cash to say, listen, you’ve got a third of your market cap in cash. That is a lot. So we’re really encouraging them to cut it.
And then other companies in the portfolio, so Keyence which is one of the automation names, it recently divested its stake in KDDI, which is telecoms companies. So it had about a 15% stake. So that’s just another example of where we are seeing these cross holdings being unwounded. So that very much to us is a new improved Japan. There is actual change that’s happening and that’s making companies much more attractive for all investors, not just growth investors like us.
SW: And you anticipate the changes that you just mentioned to continue for three, five years, the long term, not a temporary, if you like.
AH: Yeah, absolutely, because there were, in some ways it feels like we’re just at the start. So in terms of companies divesting cash on the balance sheets, a lot of low hanging fruit has happened, but there’s still huge cash on balance sheets for a huge number of companies in the topics and the pressures of corporate governance reform which has been led sort of from above in Japan, but also because of the changing macro, it just doesn’t make sense now it’s gonna be costly to keep all this cash on your balance sheet.
So because of inflation and because of rising interest rates. So we think we’re really actually still in the early stages and this will have huge longevity because it just makes sense from a financial perspective for these companies. So we think it’s gonna continue for, yeah, the next five years plus.
SW: Mid-caps in Japan seem to be a kind of growing area of opportunity. So is this opportunity set from some of the corporate governance changes, cash on their balance sheet or is it something else that’s really driving this area of the market? And then again, maybe an example of how this shows up in the Japanese fund, for example.
AH: Yeah, so the large or the mega caps includes a lot of companies like the mega banks or some of the auto manufacturers. So companies like Toyota and we’ve been underweight to those types of companies in recent years. And those are longstanding companies. So I think where we see a bit more opportunity is in that mid-cap space, which we do have a bias to. And I think it’s because those are sort of the newer companies, some more interesting innovative companies, and they’re still in the earlier stages of growth.
So examples of that would be companies like Rakuten, the e-commerce company, and also telecoms, is aiming to be the fourth telecoms provider in Japan from a zero base essentially, and making great progress or companies. I mentioned the mega banks, we don’t own them, but instead we would own a FinTech company like Shinsei Bank, which IPO’d recently. So it’s because those companies are either newer or they’re just a bit more innovative, and that’s why they’re in the mid-cap space, rather they haven’t got there yet to the larger, the mega cap. And we think that is a growing area of opportunity and hugely exciting in terms of these types of companies being innovative and disruptive.
SW: We probably can’t get through this podcast without talking about AI and tech in some capacity. So just going to bite the bullet. AI is certainly a global theme, but how does AI look when you’re looking at companies in Japan? Where are the biggest opportunities for this theme? Is it growing? Tell us a little bit about that.
AH: Yeah, absolutely. And you’re absolutely right. It’s such a topic of conversation with clients within the team when we’re discussing stocks. So for Japan specifically AI is obviously gonna be hugely important and they’re hugely receptive to it because of the demographic situation. So an aging population and a shrinking labor force. So there is an attitude of optimism and we need AI, which is fantastic, specifically for the portfolio.
One area that we think is really exciting is robotics and automation. So robotics Japan’s always been a leader in robotics, and if we think about the area itself, it robotics has delivered I guess essentially broad without the brains previously. So machines that are capable of precision, but they don’t understand what they’re doing or why they’re doing it, but that is now changing thanks to AI.
So robots are now able to think for themselves. And so for the first time, they’re able to interpret their surroundings and take natural language instructions but also adjust their movements essentially with purpose. And Japan has a huge lead, so it already supplies almost half of all industrial robots worldwide. And even thinking about the country itself, the installed base at home in Japan is twice the global average. So it has more than 400 robots per 10,000 manufacturing workers, which is growing.
And so the fund has a range of exposure from longstanding automation and robotic names. So that would be companies like Fanuc, SMC, Nidec and Keyence, which does the vision essentially for the robots. So most of those we’ve owned for more than 10 years. But then there’s also newer companies for the fund, like Yaskawa or Harmonic Drive. So that’s a lot of names I’ve just listed because there’s a huge opportunity essentially for robotics and automation because of AI and that’s just one area.
SW: And so you mentioned a few of the companies there that are obviously the producers of these kind of themes, but is it something that when you’re talking to other companies, you’re looking how they integrate some of these things into their workforce as well? So if they’re using AI or automation robotics, is that another element of kind of companies and opportunities within this theme, but maybe not as direct?
AH: Yeah, absolutely, because theoretically, most companies in the portfolio could have could be threatened by AI. So that’s conversations that we’re having with management teams, you know, are you using AI? How are you using it or does your attitude toward it?
So I mentioned, I was just in Japan a couple of weeks ago. I mean, I would say we talked about AI in at least half of the meetings. And then there’s some companies in the portfolio that we think are actually really well positioned where the markets may be taking a slightly different view short term. So one that springs to mind is Money Forward, which is a software as a service company. And one of the conversations was, you know, are you not gonna be, is AI not going to threaten your business model?
And I think we’ve seen a lot of companies selling off recently because of that. It’s being sort of defined as “SaaSmageddon” where a lot of the share prices have just been decimated because of a perceived threat of AI. But actually, I mean, Money Forward were so ahead of the game in terms of what they’re thinking about doing. It’s very difficult in Japan to lay off your workforce. So instead they’re retraining people essentially to be AI experts if you like. And so rather than being disrupted, we actually think they’re on the front and this is a huge opportunity for them.
SW: And I wanted to talk, I know you’ve named a lot of companies already, but I did want to talk about SoftBank which is in the Japanese fund. So is this within this theme, this AI thesis, or is there something else about SoftBank that is really kind of exciting that maybe is overshadowed?
AH: Yeah no, SoftBank has to be talked about. It’s been our largest position for quite some time, and it’s a fantastic company. So SoftBank has managed to successfully reinvent itself a number of times from being an early investor in lots of different areas, mainly technology. And absolutely AI is one of those areas now. So it has a 90% holding or stake in Arm Holdings which originally was a British semiconductor chip designer. And SoftBank now has yet that 90% stake. And we think that the energy efficiency of semiconductor chips is only becoming increasingly more important given the huge energy that is required for AI. These data centres use huge amounts and it’s becoming a sort of global concern essentially. So that’s one area where it’s exposed to AI, but perhaps a bit more directly is it’s 15% stake in OpenAI.
So it is the parent of OpenAI is the parent company of Chat GPT, which is on AI chatbot, and something that makes my day much more efficient for sure. And SoftBank also has a host of other investments via its vision fund, so that would include companies like wave the autonomous driving company and also has robotics exposure recently acquired ABB’s robotics division. So lots of different areas of technology, but definitely AI, one of those exciting areas where the CEO Masayoshi Son has continued to be thinking ahead of the game and trying to get exposure to different types of technology early.
SW: I do want to finish a little bit on what’s kind of going on in the world. So for those listening, we are recording on the 16th of April, so things may have changed as they are changing quite quickly. But let’s just take a kind of step back from the themes and the companies and just how does kind of the current backdrop in geopolitics and kind of volatility influence your positioning or what you are doing with the research, the funds? I know that you are long-term investors, so is it something where you try to cancel some of that noise as much as possible, or how do you react in situations like this?
AH: Yeah, great question. Given the very interesting and turbulent times we’re currently living in, so the macro backdrop does influence positioning. I mean, it depends on the company. The nature of the macro event. So it can influence, but I’d say it influences relevant, determines portfolio action.
So of course, we’re not just investing in a void, there’s a lot going on either in Japan itself, but with all the things I’ve talked about or with the world more broadly and there’s of course going to be an impact on the Iranian war and higher oil prices. So we have made a couple of small adjustments recently.
We actually went through the portfolio recently and did a kind of stock by stock analysis thinking about how is it going to perform in this more challenging environment. So we’d reduced Kubota, which is a machinery company, so it makes small machinery either for construction or also kind of if you were doing garden work, for example, like mow your lawn. And so more on the construction side we made a small reduction because it’s very much geared into kind of Asian mechanisation — sorry, long term it’s geared into Asian mechanisation — but short term it remains sensitive to US consumption. And so we felt a smaller size was more appropriate, but in other cases it’ll have less bearing.
So we are always looking for companies that are resilient and have certain characteristics, whether that’s high switching costs for consumers or very strong brand intellectual property. So that would be companies maybe like the gaming companies. So Nintendo so it’s one where I think the macro has less of a bearing. So even with the recent sort of tariff shock it’s had huge success with its switch to its new hardware device and also with its AAA games. So it’s one where I think, you know, there there’s less of an impact on macro, but of course we’re always assessing, like I say on a case by case basis given we’re bottom up stock pickers.
SW: Well, I don’t wanna finish on a negative view of the world. So let’s do kind of the opposite. As a long-term investor in Japan, where are you seeing kind of the opportunities? And then also maybe what are some misconceptions that you think people have of investing in the region and maybe why that’s wrong or they should take a little bit of a different view?
AH: Hmm, yeah. Okay. So the biggest opportunity it’s probably the revived macro backdrop, which I’ve talked about a bit, and the exciting growth that we think is not appreciated by the market currently. So looking at a lot of these innovative or disruptive companies in our portfolio or just in the market that we’ve talked about if they were American companies, US companies, they’d be trading on huge multiples, really high multiples, they’d be expensive. But in Japan they’re not. So you’re getting bargain prices essentially for innovation and these companies have very attractive forward earnings growth compared to the index. So we think that’s a huge opportunity which we think is very exciting.
And then in terms of the biggest misconception, I suppose in some ways it’s the opposite, but it’s probably that Japan is still this sleepy country that has slightly lost its way after that sort of 30 years of deflation. But in fact, it’s quite the opposite
SW: As evident by all of the things that we’ve talked about for the past, what, 20 minutes. So what a fantastic way to wrap it up. Alison, thank you so much for joining me today.
AH: Pleasure. Thank you so much.
SW: One of the oldest Japan funds in the sector, Baillie Gifford Japanese Fund has delivered outstanding returns in the most difficult market conditions. To learn more about the Baillie Gifford Japanese fund or the wider range of Japanese equities at Baillie Gifford please visit fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.
