This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
Japan’s population is ageing – fast. Faster than any other country in the world. Projections suggest that by 2050 40% of the population will be aged 65 or older. More adult nappies for the incontinent elderly are sold in Japan than nappies for infants. The decline has been sharp too; a few generations ago in 1950 those aged 65 and older made up just 5% of the Japanese population.
This development is having a negative impact on the economy; fewer people in the workforce supporting a growing number of elderly means less money spent on taxes and less money spent on consumption. Such is the drag on economic growth that recently Japan revealed it is in its seventh recession in 20 years.
The falling birth rate is to blame in part; until around 1975 most families were having two children – sustaining the population size. But then the birth rate began to fall, changing social attitudes meant women were educated to a higher level, entered the workforce and had fewer children, later in age. According to data from the World Bank the birth rate dipped as low as 1.26 in 2005, and is now at 1.43. For comparison the British birth rate is 1.92, but more interestingly Japan has the same birth rate as Italy. Italy has its own economic hurdles to overcome but they are mostly caused by banking crises rather than demographics.
The key difference is that as well as ageing Japan’s population is shrinking. Italy has always had a steady flow of immigration, even before the geopolitical issues in Syria. This means that you don’t necessarily need a birth rate of more than two to secure population growth.
Japan on the other hand is resolutely anti-immigration. It awarded full time residency to just seven refugees last year. Visitors are always made to feel welcome, the Japanese are proud of their country, but immigration is another matter entirely. As a result in 2014 the population of Italy grew 1.8%, while Japan’s population shrunk by 0.16%.
“Anyone who did the sums could have told you population decline was going to be a problem,” said Alex Treves, Fidelity’s Head of Japanese Equities. “Japan is currently spending money abroad, looking into infrastructure projects in South East Asia for example, because it knows it may not be clever to invest at home.”
The population level has not reached crisis point yet, but measures must be taken. Treves points to inefficiencies found in the service industry; the man employed by banks to direct you to a free ATM in a bank of six machines, construction workers directing pedestrians around cordoned off parts of pavement next to a building site.
Investment Opportunities Despite the Economic Challenges
An ageing population may squeeze economic growth – but it does not preclude investment growth. The adult nappies mentioned earlier are big business, as are producers of titanium hip replacements.
Healthcare companies that provide care in the home have seen revenues soar, as have tech companies which produce exo-skeletons, modern means to help the elderly frail Japanese complete everyday tasks. Even pet-products are big business as the demographic trend there are now more pets than babies in Japan.
And it not just companies that directly deal with the growing society of over 65s that are benefitting from the ageing population.
“Japan’s demographics are likely to induce technological innovation over the next few years, which will be very interesting from an investment perspective,” highlights James Dowey, Chief Investment Officer for Neptune who is currently in Japan visiting corporates.
“A shortage of labour will incentivise inventions that substitute labour for capital, which will raise productivity. For example, today we spoke to Komatsu about diggers with autopilot modes, which will reduce the skill requirements for construction work.
“In the West, the government has to balance the benefits of automation against worries about the unemployment that it may cause, so it will probably try push back against it to some degree. In Japan automation is simply the answer to the problem of labour shortages.”
…And a Chance for Gains from an Unlikely Neighbour
Don’t like the idea of putting all your investment eggs in one basket? An ageing population is not the only theme driving equity returns in Japan. Thanks to a weak yen and China issuing more exit visas than ever before, the number of Chinese tourists visiting Japan has doubled over the past year – and shows no sign of slowing.
Simon Somerville, manager of the Jupiter Japan Income fund has several stocks in the portfolio which take advantage of the inflow of visitor’s cash.
“We think some of the stocks linked to the ageing population theme are looking pricey so we have taken profits and invested in to companies which benefit directly from tourism; hotels, retailers, even East Japan Railway has seen an increase in revenues,” he said.
“Tourism may have increased significantly over the past year but the numbers are still small. Japan welcomes the equivalent of 15% of its population in tourists annually. France in comparison welcomes more than 100%.”
