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Japan is deeply rooted in ancient traditions. Digital transformation is therefore correspondingly slow, says Scott Gilchrist, portfolio manager at Platinum Asset Management, but will accelerate with the change in leadership.
Long standing Japanese Prime Minister Shinzo Abe recently resigned and was succeeded by Suga, his staunch supporter and Chief Cabinet Secretary. He retires as the longest standing Prime Minister in Japanese political history. Abe-san’s second term will be remembered for his Three Arrows of Monetary Policy, Fiscal Policy and Growth Strategy and Structural Reform. The likely counterfactual is that without Abe’s stability and reform, the country would be in a far worse position today. His successor, Yoshihide Suga is 71 years old. His core focus is privatisation and structural economic reform thus his tenure will trend in Abe’s direction with added emphasis on the Third Arrow.
Japan has handled the Covid pandemic well, as has most of Asia. Japanese companies such as Honda and Nissan both assemble cars in Wuhan where they were impacted by the early stages of the outbreak. This knowledge spread quickly across the Japanese archipelago and into the hundreds of Public Health Centres founded by the Americans who designed them to fight infectious disease. Their competent staff located clusters, tracked infection links and conducted tests. It’s not at all surprising that Japanese mortality has been amongst the lowest in the developed world, nor that many Asian countries have emerged earlier and stronger.
Digital transformation in Japan – change has been held back
The fundamental building blocks of industrial society – bullocks, canals, railroads, automobiles – have changed through the generations and are currently shifting dramatically. This broad and deep transformation is most evident in the USA, across money (Central Banking), transport (batteries, automation), geopolitics, employment structures and society.
In Japan, however, change has been held back by innate respect for tradition and their ingrained parsimonious behaviours. For example, fax machines and hanko stamps (a personal seal used in place of a signature) are still used widely across Japanese society and corporations. In fact, temples have been holding memorial services for the demise of personal seals.
But things are changing. The company GMO and their internet service Agree, for instance, have seen a twenty fold increase in digital contracts over the last twelve months, and a recent scan of SaaS (software as a service) companies in Japan unearthed hundreds of dynamic domestic-bred entities across the various ecosystems.
Japan’s economy has been forged in the North Asian transformation of recent decades. Korean autos and semiconductors are globally competitive, if not leaders. Chinese corporate progress and economic development have been relentless with the help of low cost labour.
Japan has subsequently evolved to dominate global niches and many of the 4,000 listed companies are essential to global supply chains. Hoya, for example, is a company that manufactures EUV mask blanks that are crucial for chip manufacturing. It is almost impossible to build a robot without Japanese components. Companies like Toyota, Keyence (automation technology), Nidec (Electric motors), Minebea (high-precision components) and Murata (electronics components) illustrate global reach, while Softbank and Rakuten show a more energetic spirit.
Japan markets are changing
It surprises many that the total Japanese workforce is now at record highs. The Japanese female participation rate has surpassed many western nations. Japan is widely accepted as having good credentials in ESG. The ‘environmental’ comes through in companies such as Toyota and the Prius, while ‘governance’ continues to improve as seen by recent corporate action at water and housing products maker Lixil reorganizing to a more agile culture, or the the absorption of NTT Docomo by its parent. Dividend payouts and share buybacks have risen in recent years. Japan is a local maximum for many things in Asia, including ESG.
Various Japanese market indices recently rose to 29 year highs (1991). Some broad markers are at all time highs. Over the last three decades, the composition of the listed market has changed significantly, reflecting the underlying economic changes and renewal. While these are businesses with long paths ahead, many of the older businesses are seeing a cyclical revival and value investors have noticed the attractions of the Japanese trading houses.
As you would expect at the end of a thirty year “bear market”, broad swathes of the market are at multi-decade low valuations. A recent hunt for “cheap stocks” uncovered a list of 2,000 companies with some having more cash than their market capitalisation.
The market is not the economy though. It is time to reassess Japan from a different perspective; reconsider time horizons and the power of hindsight bias. Such psychological pitfalls are well known and understood, but ongoing reminders help us outwit them. The psychology of domestic Japanese investors is changing; don’t miss the shift.
Scott Gilchrist
Portfolio Manager
Platinum Asset Management
Scott Gilchrist was an engineer and held a range of consulting and operational roles in the engineering and mining industries, before joining Platinum in 2001.
He left Platinum in 2007 to pursue other interests before returning in 2010. He was an analyst covering the resources and industrial sectors before being appointed the portfolio manager of the Platinum Japan Fund and The Platinum Japan Master Portfolio in 2014. He has also been the portfolio manager of the Platinum World Portfolios – Japan Fund since its inception in 2015.
