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Why Japan's challenges are good news for investors

Platinum Asset Management

With a shrinking population, stagnant workforce, falling currency and geopolitical uncertainties, Japan has its share of challenges. But Japan's response to those challenges is making life better for investors.

Over the past few decades Japan became an economic puzzle. Simon Kuznets, Nobel Prize-winning economist, said, "There are four kinds of countries: developed countries, underdeveloped countries, Japan, and Argentina.”

Japan was rich, safe, home to many exceptional businesses, yet grappling with economic malaise, declining competitiveness and high government debt. It was easy to assume Japan was doomed to perpetual decline. Consider the demographics.

  • The Japanese workforce could be 40% smaller by 2040 (Source: WEF)

  • The country’s total population could slip under 100 million by 2050. That’s 20 million people off its 2010 peak. (Source: OECD).

Yet underneath all the gloom, positive trends were forming – trends that caught many by surprise. This was certainly the case in 2023 where the market rose sharply as the corporate sector emerged from their long slumber and companies with asset-rich balance sheets attracted the overdue attention of activist investors.

Forces for change

As Leon Rapp, Platinum’s Portfolio Manager, Japan Strategies, explains in our video above, Japan’s much-awaited but now highly cohesive response to their weaknesses is reshaping the returns available in the Japanese sharemarket.

Demographic pressures – the sheer difficulty of finding workers – is pushing Japanese companies towards digitilisation and automation. So we hold significant positions in Hitachi, which benefits from rising investment in power grids and IT services. And in GMO Payment Gateway, a company likely to thrive as Japan catches-up in e-commerce and cashless payments.

Memories of Covid-clogged supply chains have energised ‘reshoring’ – rebuilding industrial supply chains in Japan. It’s a move supported by the government with tax policy and other assistance. At Platinum, we’re playing this theme by investing in Taisei, a large construction company likely to benefit from new factory builds. And in Keyence, a global leader in factory automation.

Japan’s long fight against deflation is now nearly over. Moderate inflation has freed companies to raise prices. That’s allowed for higher margins and better returns from Japanese companies.

Finally, Japan’s efforts to shake up its moribund economy saw government and regulators, such as the Tokyo Stock Exchange, unite to fix corporate governance. Japanese corporates welcomed those changes. As Leon Rapp puts it, “There’s been an almost revolutionary change in approach when it comes to delivering for shareholders.’ Japanese businesses are now generating better shareholder returns through higher dividends and share buybacks.

Fast Retailing – clothing the world?

The ‘lost decades’ view of Japan does the country a disservice. These are better described as years of drift, yet what Japan has lost in industrial competitiveness it gained in soft power. Japanese gaming, design and anime gained global audiences and tourism has boomed. Today, as the country responds to economic and geopolitical pressure with innovation and new-found flexibility, a different type of global champion is emerging.

Uniqlo – Fast Retailing’s signature brand - is the Toyota of apparel retailing and aims to be the world's largest apparel brand. In Japan, it’s seen as a major disruptor, meeting the needs of post-bubble consumers. Globally, their mid/value price points appeal to a broad range of consumers and the company’s global supply chains are highly efficient.

Despite the name, it is not a fast fashion label, so it’s not competing with Zara, H&M or Shein but focused on well designed, high quality basics with built-in fabric functionality (eg Airism, Heattech).

Uniqlo is a genuinely global brand. Yet apparel is a highly fragmented industry and despite its success, their market share remain low – which gives them room for growth.

With a good foothold in Japan, China, Asia and Australia, an increasingly confident Fast Retailing is focusing on growth in North America and Europe. Whilst the sharemarket tends to focus on its Japanese performance (where they are capturing share), we see overseas expansion as their largest opportunity.

Like to know more about investing in Japan?

  • We discussed Japan’s shareholder-friendly reform in a late 2023 article.

  • For an in-depth look at Toyota, Japan’s largest and most successful company, see our article on its EV strategy.

  • If you’d like to invest in Platinum funds, speak to your financial adviser. You can find information on investing with Platinum here.

Disclaimer The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

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