Notes from the Investment Floor: Japan is different and that’s good

There has been a big move in the yen, and the reason it has come about is because Japan has been doing the opposite of the US. Japan has very low inflation and the central bank is not tightening monetary policy and raising rates but rather it has been resolute in keeping monetary conditions as loose as it possibly can.

Japan is a major industrial economy, so a weaker yen is a good thing – though not as good as it used to be. Daiwa Bank estimates that a one yen move versus the dollar has a 0.4% impact on a company’s current profit, whereas 10 or 15 years ago it was 1%. The difference is offshoring. Japan used to make a lot of stuff – cars, electronics, industrial equipment – in Japan and sell it overseas. Now, it makes a lot of stuff overseas and sells it overseas. Companies benefit from the translation of those profits rather than getting revenue in foreign currency and costs in yen.

People are talking about onshoring – bringing production back to Japan — because the yen is weak, and Japan is a cheap place to make things again but that hasn’t happened yet.

The macro-economic situation for Japan is difficult. It’s a well-connected industrial economy exposed to the global economic cycle, and that cycle is challenging at the moment. Nevertheless, the current environment is throwing up some opportunities, and we’re trying to take advantage of those.

The positives for Japan are on the stock side — the realities of the Japanese economy in the corporate sector. For example, demand may be slowing globally and that might cause financial stress. There is no financial stress in Japan, where around 55% of companies have net cash positions on their balance sheets, and 40% of non-financial companies have net cash worth in excess of 20% of their equity. The household sector also is in a good cash and savings position. Japan has solidity and the ability to keep the dividends coming.

Investors often have a small allocation to Japan. Think of Japan as a diversifier. It is different from other major developed markets. There are headwinds, including the demographics of an aging population and the reduction in consumption because of that.

The final thing with respect to Japan is that it is probably number one in the world in market inefficiency. There’s a lot of sand in the machine, with some massive value traps, but that helps create huge opportunities. As active investors, we should be able to take advantage of that.