Is Japan the investment play of 2023?
This article first appeared on moneymarketing.co.uk on 17th January 2023 History has taught me to be...
The last few months of 2022 were quite eventful in Japan.
In October, the country finally reopened to foreign tourists – more than two and a half years after covid restrictions were put in place. Now, it is hoped that numbers will pick up quickly, returning to the record 31.9 million foreign visitors to the country in 2019. Those tourists will also be able to benefit from a weaker yen, which plummeted so low against the dollar in October 2022 that the finance ministry intervened in the currency market for the first time since 1998. While it has recovered a little since then, Japan – which has historically been quite an expensive destination – is still much more attractive.
Andy Brown, investment director for the Baillie Gifford Japanese equity team, told us more about this when we spoke to him for the ‘Investing on the go’ podcast. He said that costs are now much lower, as is evidenced by the “Big Mac index”.
“The cost of a Big Mac in Tokyo is almost half what it would be in somewhere like New York,” he said. “So, this is a big change and it’s just a reminder of how attractive Japan is, as a tourist destination. And there’s so many interesting things to do in Japan as a tourist as well.”
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Another unexpected event came at the very end of 2022 when the Bank of Japan signalled that it would reverse two decades of policy precedent and begin to move away from loose monetary policy, intended to keep wages and prices high.
M&G Japan fund manager Carl Vine says Japan’s monetary policy has been at odds with the prevailing growth, inflation, and wage backdrop in Japan, which is as constructive as he has seen it this century.
“For us, the big picture is clear,” he said. “We believe that Japan has exited its affair with structural deflation. We suspect the Bank of Japan (BOJ) is gradually becoming more comfortable with this same idea. The BOJ is, however, keen to avoid dislocation in bond and currency markets and wants to move incrementally.”
Japan is an outlier to most of the world in that it actually has room for inflation. Annual consumer price index inflation was just 3% for Japan in September 2022, only marginally above the BoJ’s 2%^. Contrast this with the sharp inflation spike in the US and Europe^.
T. Rowe Price Japanese Equity fund manager Archibald Ciganer, says inflation in Japan is primarily being driven by food and energy prices (4.6 and 16.9% of overall price increases respectively). He feels a clearer picture of inflation will come through at the end of the Japanese fiscal year (April 2023) – when Japanese companies begin wage negotiations with employees and union groups^.
Christophe Braun, investment director at Capital Group, says that the changes that we have seen in Japan’s investment landscape over the last decade have presented attractive stock-picking opportunities for investors with a strong knowledge of the market.
“Digital transformation, for example, is one global trend that is set to continue,” he said. “With attractive valuations over recent years, I am cautiously optimistic about the stocks of select Japanese companies that enable digital transformation. I’m watching this space as it is a critical priority for many businesses, and the Japanese government in particular.”
“There are also investment opportunities in other areas and sectors especially pharmaceutical innovation and factory automation as they offer potential for growth,” he continued. “Specifically, pharmaceutical companies like Daiichi Sankyo have strong long-term growth prospects, and with a robust pipeline of new oncology drugs, the firm has consistently improved its R&D capabilities. Furthermore, it is expanding its global reach through a partnership with global biopharmaceutical company AstraZeneca.
“Opportunities can also be found within sectors that have shown resilience, such as Telecoms. NTT (Nippon Telegraph and Telephone), is an example of a firm with defensive characteristics which protected it during the economic slowdown. The firm also has the potential to deliver stable earnings while benefiting from the secular growth across the digital economy.”
Praveen Kumar, manager of the Baillie Gifford Shin Nippon Investment Trust, also points out that while conglomerates such as Sony, Hitachi and Mitsubishi, which have powered Japan’s export growth for a generation, often spring to mind when we think about Japan, little-known specialist small and medium-sized (SMEs) Japanese companies, which are the engine room of the Japanese economy, are often overlooked by investors.
“These are exciting times for the kinds of high-growth and dynamic companies that Shin Nippon invests in,” he said. “Japan is currently riding a new wave of innovation, driven by entrepreneurial SMEs focused on developing in-house expertise and premium products in niche areas. Through their process of continual improvement, these little-known companies are establishing themselves as dominant global players across the industry spectrum. These companies are the beating heart and future of the Japanese economy and create an exciting opportunity for long-term growth investors.”
^Source: T. Rowe Price – The Outlook for Japan remains Finely Poised