16 Jan 2023
When deliberating investment in Japan, there are some key themes for consideration: the ageing population, complicated demographics and low levels of immigration. The combination of these factors creates a tricky environment with a tight labour market and a problematic healthcare system at its core.
Over 75s make up around 15% of the population in Japan and the birth rate is in decline. Why is Japan’s population shrinking? One theory is that women put their careers before getting married and having a family, but it seems more likely that the birth rate is falling because there are fewer good opportunities for young people, especially men. Japan maintains a focus on traditional concepts and men are still widely expected to be breadwinners and support their families. The lack of good jobs may be creating a class of men who don’t marry and have children because they, and their potential partners, know they can’t afford to. The shrinking population exacerbates the complexities in the labour market. With an astounding 1.35 jobs per applicant, there just aren’t enough bums to fill the seats.
What has investor sentiment been historically towards Japan? Progress in many areas has been slow going, in part due to a general approach that may be considered old-fashioned in comparison to other countries. Historically, and certainly in the 1990’s, investors have been shy of Japan, but in recent years the potential to modernise and develop, kicked off by Abenomics, has moved Japan into the spotlight.
What’s the score now? There have been some very interesting developments in Japan over the last few weeks. Inflation is at a 40-year high and, for a country that has predominantly been in a constant deflationary environment, this is a nod to the new and unexpected. The Bank of Japan is also allowing the yield to move by +/- 50 bps, which is seen as a shift in policy or potentially a quasi-indirect interest rate rise.
What is the Japanese government doing to address the imbalanced structure of the population? The population is highly concentrated in Tokyo - it’s one of the most densely populated cities in the world due to the employment opportunities. With around 14 million people in the city and the prefectures fast turning into ghost towns, something needs to be done to redress the balance. The lack of available workforce is destroying businesses and there’s already a policy in place to encourage movement to the more rural areas. The ante has now been upped though and families will receive up to 1 million yen (currently around £6,400) per child to leave Tokyo in favour of the countryside. The incentive is valid for families who stay a minimum of 5 years in the prefectures and there’s an additional sum available if you plan to start your own business as part of the move. There’s even a reality tv show following successful couples and families who have left the city to start new lives in the prefectures.
The policy to address the demographic issue is indicative of a more general move towards modernisation of Japanese culture. So, what about immigration and globalisation? Immigration is gaining momentum, other languages can now be heard across the city of Tokyo, and a previously cash-orientated society is finally moving towards card payments. These themes and the potential for development and modernisation offer serious potential for investors going forward.
Uniqlo, a textiles manufacturer originally founded in Yamaguchi, Japan in 1949 and now a global clothing brand, has announced their plan to raise wages by up to 40%. Their aim is to move away from the old-fashioned approach of living at your desk by rewarding people on their ability to do their job. This overarching shift in approach means that businesses are able to attract international talent.
When it comes to automation and robotics Japan is, without doubt, at the forefront of technological advancement. Born out of a necessity to plug the gaps left by an insufficient workforce, the sharp focus on robotics and automation has provided essential human replacement services such as self-check-in at hotels, vending machines and exoskeletons to assist the elderly.
Japan can export their advanced robotic technology around the world but when it comes to software, there’s room for improvement. Historically, many Japanese companies have used internal software solutions, but now the first-generation software engineers are reaching retirement age, creating a crunch point, but also representing an opportunity to go down the road of standardised software solutions. Japan is still coal and gas dependent meaning that energy is another area for improvement and potential investment.
What has the pandemic meant for Japan? Japan has been better placed than some countries to deal with the pandemic as their automated society means that less interaction is required. The pandemic has given Japan a shove in the right direction to modernise and rejuvenate, a catalyst to play catch up in their less developed areas, remote working being a good example.
As an investor, you may have been burnt by Japan in the past but, as a major beneficiary when it comes to the Covid-19 catalyst, development and modernisation are now occurring at an accelerated rate. Corporate governance has been an area of concern in the past in Japan, but companies are now more receptive to the ESG perspective, especially governance.
From an investment viewpoint, the longer-term trends will remain the same. Japan has some incredible businesses such as Sony and Nintendo and their positioning when it comes to advanced robotics will certainly stand them in good stead for the future. Internally at RSMR, Japan is one of our more favoured equity areas. However, like a lot of growth areas, a blended approach with a mix of core, value and growth could be a strong longer-term portfolio strategy. A blend of ‘out with the old and in with the new’, progression and modernisation is transforming Japan into an exciting and inspirational place for investment.
Stuart Ryan, Head of Research
Katie Poulson, Client Engagement & Marketing Manager
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