How the pandemic has changed Japan

Japan had reason to celebrate last week, when Hideki Matsuyama made golfing history. The 29 year old became the first Japanese player to win a men’s major championship when he secured victory – and the coveted Green Jacket – at the Masters. Japan’s TV networks even interrupted normal breakfast programming with breaking news alerts to mark the win.

Japan has had other reasons to celebrate too: the stock market remains at close to 30 year highs – but overseas investors still seem reluctant to invest in the country. Despite it being the third largest economy in the world, home to more than 3,700 listed companies and the second largest country weighting in the MSCI All Country World index after the US, it remains unpopular – almost £74m was taken out of Japanese equity funds in February alone*.

Three decades of stagnant economic growth and deflation have not enamoured investors to the country, but despite this backdrop, good money has still been made.

“Our fund is full of companies which have overcome decades of economic volatility, currency appreciation, threats from cheap labour and imitation, and even geopolitical risks, to become the main suppliers of those brands and technology,” commented Richard Kaye, co-manager of Comgest Growth Japan.

“Japan remains one of the most misperceived and under-researched markets in the world,” he continued. “On average, each stock in the Japan indices is followed by around seven analysts. In contrast, there are more than 40 analysts for companies in the US indices.”

This lack of interest from even professional investors creates opportunities for fund companies and managers that can conduct their own research.

“The opportunity for active Japanese equity management to outperform even global indices is unchanged, in our view, with the breadth of excellent companies and the attractive valuations owing to a lack of coverage,” said Richard.

“As the world reopens, the rediscovery of Japan will continue.”

Shaking up Japanese traditions

Historically, Japanese businesses have been notoriously slow in adopting modern business practices. Until recently, for example, a physical stamp (the ‘hanko’) was still used by many in place of a signature to process official documents. Unlike in other developed markets, the discerning nature of Japanese consumers, who value personal contact and high standards of service, has also insulated brick and mortar retailers from online competition.

But this state of affairs has been shaken up by the pandemic, as restrictions to avoid the spread of the virus have forced consumers and companies to adapt.

“It would be fair to say that the impact of the pandemic goes far beyond just affecting businesses in Japan,” commented Praveen Kumar, manager of Baillie Gifford Shin Nippon investment trust. “Traditional business practices, consumption patterns and the provision of critical services like healthcare have all witnessed a fundamental shift. Both businesses and consumers are realising the immense value that technology and online services bring to the table, and therefore we think many of these trends are likely to persist over the long-term.
When the Japanese latch on to something and see it works, there is rapid and widespread adoption.”

Sophia Li, co-manager of FSSA Japan Focus, agrees: “The 2011 Tōhoku earthquake taught us that significant external events can change consumer behaviour – even against the backdrop of Japan’s conservative society norms,” she said. “The longer such catastrophes continue, the more structurally embedded the new behaviour becomes.

“To date, despite Japan boasting one of the largest annual IT expenditures globally, the pace of digital adoption there has been slow. There is still a strong attachment to methods from the “old days”, with manual processes and offline business models. However, with tailwinds brought about by Covid, companies are now picking up the digital pace.”

Thomas Patchet investment specialist for Japanese equities at Baillie Gifford, told us more in this podcast:

Praveen continued: “Old Japan was full of low or no growth companies and legacy industries. Management lacked dynamism, there was poor corporate governance, and the market deserved a low valuation.

“New Japan has exciting, high growth firms, new business models and globally relevant technologies. Millennials and Gen Z embrace optimism and there is a renaissance for risk tolerance and changing consumption patterns: frugal spending habits have been dropped in favour of a loosening of purse strings.

“Innovation is opening in new sectors, increasing the crop of young, dynamic entrepreneurs. There is a greater focus on shareholders and returns a very little sell-side coverage – so there is real scope to add value for investors.”

Research FundCalibre’s Elite Rated Japanese equity funds and investment trusts

*Source: Investment Association, net retail sales, February 2021

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