For a long time, investing in Japan was a frustrating experience. Perpetual stagflation and anaemic growth blighted the economy, while the stock market rose and fell with alarming repetition – climbing back no higher in each rally than the position it held in 1993. But thanks to a revolutionary leader, the stars look to be finally aligning for Japan.
At 19,753 today, the Nikkei is some way off the 37,269 peak of 1989, but the outlook for both the stock market and the economy is positive. The government this week revealed that the Japanese economy expanded at an annualised rate of 4% in the second quarter to the end of June. This is the sixth straight quarterly growth figure – the longest growth stretch in a decade for the country – thanks to rising capital spending and private consumption.
This 4% estimate is a considerable upgrade from the Bank of Japan’s statement last month that it expected the economy to expand 1.8% for the current financial year to March 2018.
JPMorgan’s Nicholas Weindling is positive on Japan’s prospects – and says that his colleagues are too. As a Japanese equities investor it is hardly surprising Weindling thinks the future is bright for his market, but he says that colleagues who invest across the Asia Pacific region and JP Morgan’s multi-asset fund managers are overweight Japan in their portfolios too. He says the positive sentiment is due to Prime Minister Shinzo Abe.
“The government of Japan is stable – especially compared to the US and UK,” he explains. “Before Abe came along, Japan had a new Prime Minister every nine months. Abe is known globally, and is known to be a source of stability.”
Abe has cut the corporate tax rate, entered into negotiations with the European Union for a free trade agreement, signed up to the Trans-Pacific Partnership – and support for his party keeps growing. Today, his approval rate is 37.5% - compared to just 7.3% for the opposition, and it has stayed consistently at that level since March 2013.
What Has Changed?
Since Abe came to power, the tourism industry has boomed. In 2012 there were nine million visitors to Japan. Last year tourism peaked at 23 million visitors, with many from nearby China – a direct beneficiary of the loosening of Chinese visa restriction. Female employment rates have also improved under Abe, up to 66%, higher than in the US.
The employment story is an interesting one; Japan has a demographics issue. They are not the only country with an ageing population; nearly two billion people across the world are expected to be over 60 years old by 2050. China, the Scandinavian countries and Italy all have more than 20% of their population over the age of 65. But Japan is unique because it tightly controls its borders, whereas those other countries have a steady stream of immigration propping up the system.
While some investors see the growing burden of an ageing population as a reason to avoid Japan, Weindling says that it has thrown up some unique opportunities for growth.
Profiting from an Ageing Population
In the UK the top two chemists dominate the market, with 60% market share – leaving little room for growth and presenting a market very challenging for a start-up to break. But in Japan the top 10 chemists have just 30% of the market share – the rest are ‘Mom and Pop’ shops, small, family run outfits with no successors leaving huge scope for industry consolidation and an excellent opportunity for a larger player.
Add to that, an ageing population is more likely to need medical assistance and equipment; his Weindling JPMorgan Japanese Investment Trust (JFJ) owns Sysmex Corporation for example, which makes laboratory equipment,and Topcon Corporation, which manufactures optical equipment and healthcare systems.
With a shrinking working population, Japan has record low levels of unemployment and the economy is poised to receive a boost once this lack of supply filters down to wage growth. But there are equities which can profit from the tight labour market to,o according to Weindling; he invests in recruitment firms that provide permanent and temporary workers.
Suppliers Immune from Domestic Threats
While the population is ageing, Weindling points out that a Japanese company does not need a Japanese customer base to thrive.
“There is no reason why Japan should not continue to make things. Factory automation and robotics are not a threat to Japanese industrials in the way that they are to US companies – they are the solution to a dwindling workforce,” he says. “More automation is a good thing, and the larger industrials will continue to take market share. It is a multi-year, structural shift.”
That does not mean he backs the exporters of old, however. The international names which have long been synonymous with Japan are electronics firms and auto-makers; Toyota, Canon, Mitsubishi and even Sony are no-go areas for Weindling.
“No one buys cameras anymore, so why would I buy Canon,” he says. “We don’t own any of those household names. Their prospects are considerably lessened. Japan’s export market is no longer about cars and electronics, it is about condoms, baby milk, skin cream, medicine. Japan is known across Asia for high-quality products, reliability and high safety standards. These are the companies you want to be invested in.”
