The changing shape of Japan’s investment opportunities

It is often said that the Japanese market takes the world’s woes on its shoulders, but in the recent market sell-off, its stock market, the Nikkei, fell less than both the UK and Europe and has staged an earlier comeback. Amongst developed markets, only the US’s S&P 500 has been stronger.

Was this because Japan was better prepared for a pandemic? Japan’s emergency measures were not as drastic as many other countries, with many shops, restaurants and construction sites staying open. Today the country is almost back to ‘normal’ and the economic impact of the virus is expected to be smaller than in other countries. While there have been periodic flare-ups, deaths from Coronavirus per one million people are about eight – one of the lowest numbers in the world.

As the managers of Baillie Gifford Japanese pointed out, after years of natural disasters and man-made financial crises, the cash-hoarding by Japanese companies seems almost clairvoyant. The Japanese even have a word for looking worse after a haircut – as many children and husbands worldwide will have experienced in lockdown – ‘ageotori’.

In the week that would have marked the start of the 2020 Tokyo Olympics, four fund managers give us their view on the opportunities in the world’s third largest economy.

What are the investment opportunities in Japan?

Matthew Brett, manager of Baillie Gifford Japanese fund, has been exploring how recent dislocations could reverberate into more significant structural adjustments to both businesses and behaviour: whether those behaviours exhibited during the pandemic – like online gaming – will persist, and act as an accelerant to changes already underway.

“Of particular focus has been the domestic acceleration of a contact-free economy and the localisation of manufacturing on a more global scale,” he said. Referring to a number of fund’s holdings, he continued: “Could wider adoption of digitally-disintermediated services aid internet infrastructure provider GMO Internet, and drive growth for Rakuten’s ecommerce ecosystem? Will Yaskawa, Fanuc and Keyence – global leaders in robotics, automation and vision learning – benefit from offering companies, with stressed supply chains, new labour-saving solutions?”

Factory automation and robotics have been a big theme in the portfolio for some time. “What’s so exciting for us is how robots are being used beyond the car industry and the electronics industry,” he told us in a podcast in February.

Comgest Growth Japan’s managers also like some companies benefitting from these possible longer-term trends. Examples include GMO Payment Gateway (cashless processing), Daifuku (e-commerce logistics), MonotaRO (disintermediation of hardware supply), M3 (medical portal) and Kobe Bussan (a Costco-style supermarket with a superior supply chain to incumbents and a group that is even taking share from restaurants as people increasingly eat more at home).

In a podcast interview at the end of February, co-manager Richard Kaye told us that Japan has been undergoing some dramatic changes over the past few years: regulatory, political, social and demographic. And the investment opportunities thrown up by those changes are extraordinary.

“Japan also has a vibrant internet sector,” said Richard. “Many of what we call the Silicon Valley of Japan companies are not researched, not known, but they’re growing just as rapidly and offer much cheaper valuations than their US counterparts.

“The country is also full of aspirational brands that the Asian consumer loves to buy. That’s what we call ‘cool Japan’. We’re talking about young people in Thailand, China, and increasingly India, recognising Japanese clothing, cosmetics, furniture and daily goods brands, and buying them either as tourists in Japan or online or increasingly offline, in fact, in their own countries.”

T. Rowe Price Japanese Equity manager, Archie Ciganer, is another fan of the long-term investment opportunities in trends such as the shift from offline to online in the form of e-commerce and factory automation.

“We also see opportunities in companies with exposure to China,” he said, “where the economy appears to be re-opening.

“The focus now is on the depth of the economic recession we are facing and the duration of the social restrictions to control the coronavirus. Encouragingly, policy stimulus has been swift and decisive. These measures should help soften the recession and buy time for companies and consumers facing near-term cash flow. Corporate Japan is cash rich, which is providing the local market with some respite, as investors are generally concerned about balance sheet risk.”

Chisako Hardie, manager of AXA Framlington Japan, added: “Over the past few months, due to the pandemic, people’s lifestyle and the way businesses operate have altered significantly. In many sectors vested interests finally have to give in and could make the post-pandemic society look quite different from before.

“We believe that the digitalisation of Japan, which has surprisingly lagged Europe, will accelerate. On the other hand, the property market is likely to be negatively affected: investors started thinking the trend for centralisation of businesses and population movement into Tokyo over the last few decades may be reversed in post-pandemic Japan.”