What makes a good mathematician or a good entrepreneur is not only years of experience but also – and above all – the attention they give to their field of study or their industry. You have to be passionate and patient. Whether in innovation, cutting-edge technologies, robotics, the arts or gastronomy, Japan excels and is today enabling the modernisation of great swathes of human activity. However, this is nothing new and could easily serve as an introduction to Japan in the 1990s. Is the country any different today or is it condemned to deflation? And what changes can holders of Japanese equities expect in the future?
Shinzo Abe, who was elected in 2012, ushered in this most recent stage of evolution in Japan. The country, which, it should be noted, is quite conservative, has gone through three massive waves of modernisation in the last 150 years. The Meiji Restoration in 1868, which was a prelude to a Japan that had until then shunned contact with other countries opening up to the world, saw industrialisation take off. In 1945, a devastated Japan saw all the progress it had made since 1868 turn to dust, but it still had the collective know-how and can-do attitude that would propel the country into the top tier of industrial powers by 1990. The two decades that followed saw a real-estate bubble burst, but most importantly, structural deflation set in. This would last until the appearance of Abe and Kuroda, and the introduction of an extremely flexible monetary policy based on reforms and fiscal stimulus. In order to survive, Japan had to make structural changes, and it has succeeded in doing this.
The consequences of this stimulus can be seen over the longer term: a return to growth, as measured by positive GDP for close to five years now, and inflation. We are also seeing it in the expectations of those who are most impacted by it: the consumer. The increase in fixed and variable pay reinforced the effect, as did the lack of people to fill roles in key sectors such as services, healthcare and construction. All these factors explain the Japanese stock market’s behaviour: +130% in yen terms since 31 December 2012.
Beyond a shift in the wage and price dynamic, Japan is also benefitting from the coordinated pick-up in the major economies. However, the question has to be asked as to whether these cyclical factors are simply incidental or whether we are seeing a structural shift in the perceptions of the Japanese consumer, as well as local and international investors. Are the green shoots of recovery that are being reported in the press and by economic sources hiding the wood for the trees? The most fundamental change affects corporate governance, immigration and women’s participation in the workforce. Is not necessity the greatest mother of invention? The increased participation of women in the workplace, coupled with Japan opening up to foreign workers, represents a radical cultural and social response to a demographic necessity. It is also a necessity for pension funds, which invest in domestic equities to improve and meet their financial commitments.
The biggest private and public pension funds have increased their allocations to domestic equities, and this could only be achieved with the promise of change in companies’ attitudes to minority shareholders. More dividends and share buy-backs, improved returns on equity, the creation of indexes based on these criteria: these are all signs of a major change in the shareholder-business relationship. In a country in which conglomerates and a lack of transparency have in the past caused a fall in value in comparison with global equities, this change of practice has seen an evolved Japanese brought into our allocation guidelines.
Cédric Le Berre
Japanese Equities and Emerging Markets at UBP