The article is as unflattering as it is accurate, describing many of the challenges which we have faced as investors. The journalist outlines five major pathologies from which he sees Japan suffering – affecting property, wages, efficiency, public finances and politics – all of which are expressions of Japan’s mother characteristic: its aging and declining population. This piece aims not to debunk the BBC article – we agree with much of it – but to outline the approaches we have taken such that our clients might benefit from the realities which it describes. Let’s meet the issues one by one:
1. Rural Japan is dying off, and property is a depreciating asset
Increasingly, homes in Japan lay empty. Nomura Research Institute estimates that 11 million residential properties are unoccupied – more than the entire housing stock of Australia.3 Depopulation combines with Japan’s culture of scrap and build in a way that is toxic to property prices. Even in urban areas where land values are more stable, housing is seen as a depreciating asset, not as a store of wealth.
We deal with this reality by combining common sense with contrarianism, a recipe which will feature repeatedly. From a strategy perspective, we tend to avoid regional banks, of which there is a worryingly large choice – more then seventy are listed on the Tokyo Stock Exchange. Some argue that their market value is even lower than their intrinsic worth, and others have fought to change management in the hope of attracting a fairer price. They might be right, but with such a paucity of growth opportunities, bloated costs and pressure to continue to prop-up struggling local businesses, we choose to look elsewhere. That is common sense.
In contrast, Katitas – which buys, renovates and sells unoccupied property – appears to be swimming against the tide. For this company, the availability of empty homes is a boon. Transactions, often with the estates of diseased owners, are simple. The properties are cheap. Of course, Katitas must ensure there is enough life in the locality to provide demand; we would be worried if they opened a branch in Nagoro. Management has a great record of doing just that – if consensus estimates for the current year are right, the business will have doubled operating profits over the last half decade.4 A keenly priced Katitas home is perfect for those who expect property prices to erode and for those on low and stagnant incomes. This brings us to our next issue.
Source: Bloomberg, 30/01/2023
Underlying wage growth in Japan has been minimal
How to play this as investors depends upon the expected magnitude of wage hikes. Certainly, there have been some arresting headlines; last month Fast Retailing announced 40% pay rises for its Uniqlo staff in Japan.8 But elsewhere the indications are for more muted growth, such as the January survey of private businesses which reported that just 2.75% wage increases were planned on average.9 For our part, we think that companies like engineer staffing company TechnoPro and direct online recruitment business Visional are best placed to benefit from the febrile labour market.
We remain sceptical that wage growth will be sufficiently large or sustained to initiate a full-blooded consumption boom. A big part of the reason for this is that Japanese labour productivity is so poor. Why pay more for workers when their output is so disappointingly low? Which takes us to our next issue.
Source: OECD, 2022
On this score, Japan simply must change. As the country’s stock of workers dwindles, remaining employees need to be allocated more efficiently and be digitally tooled so that they might do more. Japan’s business process outsourcers allow client companies to focus scarce labour on core, productive work. We prefer well managed, profitable niche players like Prestige International and Direct Marketing Mix. Software and IT consultancy companies such as Simplex and WingArc are dragging corporate Japan belatedly into the present day and growing themselves as they do so.
For most sectors, the imperative to boost productivity comes from the supply side – the shrinking labour force – but there are implications for demand too. This is where we head now.
Source: OECD, 2022
We are convinced that a better approach is to take a look down the other end of the telescope – focusing not on businesses which should benefit from growing demand per se, but at those easing the pressure on a government struggling to pay for this inexorable burden. Here, we like JMDC which uses its stock of medical data, gleaned from its work with the insurance industry, to boost productivity across the medical sector. This mention of government brings us to the final point.
An interesting observation perhaps, but what does this mean for investors? To say that it implies political stability in an increasingly unstable world is to damn Japan with faint praise. More meaningful is that it implies that the current realities of Japan – as set out above – are more likely to be persistent. It pours cold water on any great hope that mass immigration will be used to offset Japan’s demographic trajectory. There is little clamour amongst Japanese to ship in more foreigners to work, and that seems unlikely to change.18
Source: Pew Research Centre
2 There Are No Children Here. Just Lots of Life-Size Dolls. – The New York Times (nytimes.com)
3 Japan’s empty villages are a warning for China | Financial Times (ft.com)
4 Bloomberg, Feb 2023
5 Smith, Benthos, December 2022
6 Minimum wage rises to exceed central government proposals in 22 prefectures | The Japan Times
7 Smith, Benthos, CLSA, Jan 2023
8 Uniqlo owner to raise wages in Japan by 40% as inflation climbs | Financial Times (ft.com)
9 Smith, Benthos, CLSA, Jan 2023
10 OECD, Jan 2023, Level of GDP per capita and productivity (oecd.org)
11 World Digital Competitiveness Rankings – IMD
12 Japan’s reliance on fax machines lambasted by coronavirus doctor | The Independent | The Independent
13 Centenarians in Japan top 90,000 for first time | The Japan Times
14 List of countries by life expectancy – Wikipedia
15 MHLW, Nippon.com, Japan’s Healthcare Expenditures Reach Record High | Nippon.com
16 Smith, Benthos, Jan 2023
17 Japan PM’s approval rating sinks to record-low 35% – Nikkei Asia
18 Pew Research, 2018, Most Japanese content with current immigration numbers | Pew Research Center
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.