Over the past few years, Japan has been pushing towards digital transformation. The plan for a digital agency marked one milestone, another is the Digital Transformation Stock Selection (DX Stock) initative which is gaining momentum in 2021.
Japan has a lot of catching up to do in terms of digitalization. According to a former study by Japan’s Ministry of Economy, Trade, and Industry (METI), around 80% of firms have aging technology infrastructure, while another 80% have IT-related expenses pegged for just existing systems maintenance.
Against this backdrop, METI created the “Competitive IT Strategy Companies” list in 2018, which was renamed to DX Stocks (DX = digital transformation) in 2020. In it they select companies from among those listed on the Tokyo Stock Exchange that are “establishing competitive advantages by leveraging data and digital technologies.”
The recently released list for 2021 features 28 Japan DX stocks, including Fujitsu Ltd., SoftBank Corp., Shiseido, and Chugai Pharmaceutical Co.
Why investors need to take notice of Japan’s shift towards DX
According to a June 2021 analysis by Fidelity International, the one-year performance of an equal-weighted portfolio of these 28 Japanese DX firms outperformed an equal-weighted Tokyo Stock Price Index (TOPIX) portfolio by 25% points (as of 31 May 2021). Furthermore, data over the same period shows an equal-weighted portfolio of the stocks in the MSCI Japan Growth index actually underperformed the TOPIX stocks.
“Digitisation is a key theme currently in Japan, with companies recognising that it will enable growth and strengthen competitiveness,” says Takashi Maruyama, CIO Japan for Fidelity International.
He further pointed out how the awareness of digital transformation has improved dramatically over the past three years both among Japanese companies and investors. “A keyword search of the financial statements of the more than 2,000 companies listed on the First Section of the Tokyo Stock Exchange shows the term DX was mentioned by 71 companies during March to May of 2019. This number jumped to 395 during the same period this year.”
These 395 firms also outperformed the rest of the First Section over the past three years by an average of 16.1% as of 31 May 2021. Maruyama argued that since DX capabilities lead to competitive advantages as demonstrated by performance comparisons, it should be a critical factor in stock selection.
Japan’s digitalization push
The Japanese government, led by Prime Minister Yoshihide Suga, demonstrated its dedication toward its digital transformation policy, with the appointment of Takuya Hirai as minister for digital reform last year. Hirai said that his appointment was part of an effort to allow Japan to catch up from decades of lackluster digital technology adoption, despite being one of the most advanced economies in the world.
Japan has long been struggling with administrative reforms. A Covid-19 stimulus payment for resident and companies encountered problems due to long processes. Furthermore the use of fax in reporting coronavirus infections got under fire as well.
The new government agency will launch in September. Suga described it as a “strong organization which can function as a powerful control tower, with highly talented people gathering from both the public and private sectors, to lead the digitalization of the society as a whole.”
According to Archibald Ciganer, Portfolio Manager, Japan Equity Strategy, T. Rowe Price, Japan’s recent push toward digitalization is an exciting time for those industries and businesses at the forefront of this change. He sees several growth areas, from telemedicine to cloud computing to online payment processing.