17 Feb How do investment opportunities in Japan look right now?
If we cast our minds back almost a year to the very start of the COVID-19 crisis, Japan looked set to be badly impacted. Due to its close proximity to China, the source of the pandemic, along with its densely populated urban areas and massive population of elderly people, Japan seemed to be on a path to disaster.
At that time, a cruise liner was forced to quarantine in Yokohama, prompting Japanese authorities to force passengers to stay on board. This decision was criticised, as was the apparently very slow testing of passengers. However, despite all of this, Japan has largely emerged as one of the few COVID-19 success stories among developed economies. So, what does this mean for investment opportunities in Japan?
How much has COVID-19 impacted investment opportunities in Japan?
At the time of writing (18 February 2021), Japan has a total of 420,000 cases and 7,218 deaths. Compared with the UK that reports 4.07 million cases and more than 119,000 deaths, it’s clear to see which country has managed the virus better. This is despite the fact that Japan’s population is roughly twice the size of the UK’s.
Economically, Japan’s decline in gross domestic product (GDP) is less severe than either the UK or the US. According to the Office for National Statistics (ONS), the UK’s economy shrank by 9.9%. This is more than twice the biggest annual fall ever recorded. And while Japan’s economy had contracted sharply by July 2020, it has since recovered much faster.
Japan’s much lower case and death rate is at least partly down to the differences in lockdown measures. Japan did not impose the same kind of national lockdown that we saw in the UK and Germany, for example. Instead, each city imposed staggered measures to stop people from spreading the virus. A state of emergency was imposed in Tokyo and some other regions on 7 April 2020 but was lifted from May onwards.
Due to Japan’s less draconian closures relating to public transport and work, its economy was able to stay more buoyant in the first half of the year. A spike of cases did hit Q3 2020, driving deaths up. However, comparatively speaking, it’s clear that Japan has minimised cases and deaths. This could be partly down to cultural acceptance of mask wearing as a normal thing, and the fact that greetings traditionally avoid hand shaking and touching. Either way, there was a higher level of public observance of measures to contain the virus than in other developed markets, such as the UK and the US.
What kind of opportunities are there for overseas investors?
Today’s Japan, regardless of COVID-19, still offers overseas investors plenty of opportunities. Over the last ten years or so, Japan’s Government led by former PM Shinzo Abe and the current PM Yoshihide Suga, has been reforming its financial sector. Corporate governance is hugely improved and there is much more transparency and accountability across the board.
Investors are responding, with the Nikkei index of leading shares regularly hitting its highest levels since way back in 1991. However, the index hasn’t yet reached its former heights from the late 1980s. And while valuations are higher than before, share prices hover at around the same as those in Western Europe.
However, whatever the overall market’s pricing levels, there are many excellent investment opportunities within the economy’s complex sub-sectors. There are more than 3,700 companies to choose from listed on the Tokyo Stock Exchange (TSE), for example. The top performing UK-listed Japan investment trust, JP Morgan Japan, delivered returns of 60.9% in 2020.
The fact remains that Japan’s strengths as an investment hotspot are often ignored or overlooked. There is no doubt that with such a large ageing population, there is a difficult demographic in Japan. With millions of pensioners who aren’t working or spending, it’s difficult for GDP to raise above the parapet. Companies that are too nervous to invest also hold the economy back.
Building investor confidence in Japan
Investor confidence has also been hit to a certain extent by the rising economic strength of other Asian countries. This particularly applies to China, and there is some evidence that these threats are causing Japan to retract inwards. A clear example of this can be seen with the number of Japanese young people choosing to study overseas. This has fallen over the last two decades, while in most countries it has risen.
Japan is the third biggest economy in the world and is a nation packed with sophistication and scale. Excellent public infrastructure, a well-educated workforce, a standard of life-long corporate training and more make Japan a pleasant and efficient place to work. And it also makes Japan an obviously efficient and safe country in which to invest.
Choosing to invest in Japanese stocks is putting money behind strong companies with enormous potential. These businesses have access to the best technology and will succeed with developments that aren’t necessarily linked to domestic consumer demand.
There is a widely implemented drive to digitise Japan too, and there are still many tech leaders based there. These include electric vehicle pioneers Nidec, sensors specialists Keyence and robotics manufacturer and developer Fanuc. Along with these vast tech manufacturers, there are many consumer-orientated brands and companies based in Japan. In Asia, quality brands such as Shiseido (cosmetics) and Rakuten (Japan’s equivalent of Amazon) are thriving.
Ecommerce and digitisation offer major investor opportunities
While Japanese banks are still only in the early stages of ditching the traditional reliance on paperwork, there are still major opportunities in this space. The Internet is still under-developed and under-utilised in Japan, but COVID-19 is pushing digitisation ahead much faster than it would have done.
The Internet has been held back by legislation, regulations and a reluctance to lose the old ways. However, since COVID-19 arrived, endless companies and consumers are making the change. They’re buying online, doing business online and changing from cash to contactless.
Despite these recent advances, ecommerce in Japan is far behind the sector in China, the US and the majority of Europe. And while Japan playing catch-up isn’t the best for the people who live there, for Internet investors it’s an amazing opportunity. Using the models of other countries, investors know how this is going to go.
All kinds of Fintech start-ups are on offer for investors who want to buy shares. These growth stocks include medical diagnostics companies like M3 and cashless payment providers such as GMO. So, while many investors tend to automatically think of the big-name Japanese companies such as Sony, this isn’t where the big opportunities are. Instead, companies lower down the scale that are funding smaller businesses to digitise and provide services for consumers provide investment opportunities. Let’s not forget that in most other developed countries, much of the digital transformation’s investment gains have already been made.