Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

Is there a new dawn for investors in Japanese Equities

By Sean Thompson, Managing Director CAMRADATA. 

When it comes to investment in Asia, China often takes the lion’s share of the press interest. China’s growth outlook, opportunities for foreign investors, concerns on indebtedness, US/ China trade wars and, lately, coronavirus has provided no shortage of eye-catching headlines.

It is easy to forget Japan remains the third largest global economy and stock market. Investment Association (IA) statistics highlighted that UK investors deployed £24.5bn in Japanese all-cap and small cap equities (end 30 Nov 19).

But while the Japanese economy and stock market attract investor attention, there is often a degree of cynicism, with waves of enthusiasm frequently being dashed by disappointing returns. There are many common beliefs and, perhaps, misconceptions that have deterred investors.

These include the fact Japan is an ageing economy in secular decline, Japanese companies are known for their inefficiencies, they lag their global peers in terms of governance, and they are not run in the interests of minority investors. Also, Japan is seen as a ‘value’ market and with China as the dominant force in Asia, Japan is seen to have had its turn.

While some of these may still be true to a degree, there are signs things are changing. The Japanese market is evolving and becoming more attractive to investors. Monetary stimulus, fiscal expansion and structural reforms are all helping to bring this change, which could be exceptionally positive for future investors.

Barriers to change

There are challenges however, both in terms of cultural differences and how companies operate, which can mean change is slow.

One area is the hierarchical nature in corporate Japan, with progression coming from time served by employees rather than achievements delivered.  In poorly performing businesses if the workforce is large, but doesn’t want to retire, it can be difficult for management to change this.

Japan has started to address such issues with structural reforms, including several labour reform bills implemented to help raise workforce productivity, which remains at the bottom of OECD nations.

But whilst improvements are being made, there remains a culture of boardroom seats being passed around in many companies, with the same people moving from the boardroom, to CEO, to chairman and then lifetime advisor. This is can limit fresh ideas and impetus. Diversity also remains an issue in Japan. Whilst there has been an uptick in immigration, and women are being encouraged back to work, Japan lags its global peers in terms of embracing diversity.

Seeking growth in an ageing economy

For Equity managers seeking growth, they could consider two approaches. One option is to look for Japanese global leaders in large cap multi-national companies and the other is to search domestically for under covered smaller and mid-sized companies with a clear runway of growth.

Taking the first approach, Japan has global leaders in precision manufacturing and robotics on the industrial side and some consumer brands including cosmetics and baby product brands that appeal strongly to rising middle classes in emerging economies including China, India and Indonesia.

Examples of Japan’s global successes include Pigeon, a Japanese baby products company which has seen explosive sales growth from expanding into China and Toyota, the poster child for manufacturing excellence which is top of global car manufacturers in terms of sales volume.

For a global investor, investing in a Japanese equity portfolio of global businesses on an unhedged basis delivers a natural hedge thereby calming currency volatility. Though it has not always been the case, leaving a Japanese equity portfolio unhedged often makes sense in the portfolio context.

The second approach means fishing in different pools for growth and scouring the market for growth in mid/small caps. This is where a thorough understanding of Japanese culture and language can be hugely beneficial in order to analyse the culture of smaller companies.

The Japanese equity market has unique characteristics for potential alpha generation, the tech-savvy children of Millennials, and there is enormous dynamism in start-ups with differentiated business models. The depth of Japanese small and mid-cap stocks to choose from is substantial too.

A lack of M&A activity, historic listing of subsidiaries and companies listing considerably earlier than their global peers has resulted in a huge range of companies to choose from. The rise of the internet has levelled the playing field on informational access, but some equity managers continue to see great value in visiting company headquarters and manufacturing sites and interviewing members of the supply chain and customers in Japan and abroad.

Travelling beyond the financial bubble of Tokyo to the regions can deliver less commonly examined opportunities and intelligence on production capabilities, and company culture too. Often these earlier stage companies have dynamism and higher quality management coming from top tier Japanese universities with a more entrepreneurial mindset. These companies can offer investors great opportunities.

To conclude

There is a new dawn for investors in Japan, but this comes with a note of caution for investors who will need patience to understand this will take time.  While analytical scepticism remains essential, the green shoots of change make the Japanese market well worth monitoring for opportunities and return in a balanced portfolio.