COVID-19 and the consequent market volatility have had a huge impact on the Japanese economy. How will the situation affect the Japanese equity markets in the years ahead?

Equity portfolio manager Dickon Corrado shares his views on why Japan is well-positioned for the future.

 

Has Japan been successful at controlling the COVID-19 outbreak? Do we expect the coronavirus situation to worsen going forward? 

What is so striking about the COVID-19 situation is the statistics in East Asia. The number of coronavirus cases has been relatively low in places like South Korea, Taiwan, Japan, Vietnam and other parts of China, outside the city of Wuhan.

In Japan, the total number of coronavirus cases is about half the level of the peak amount the US had in single days. One of the reasons the situation has been kept under control is that the Japanese are naturally good at social distancing. Japanese people normally greet each other by bowing instead of shaking hands, and hugging isn’t part of its culture. Moreover, the Japanese wear masks regularly, especially when they are unwell. Hence as a society, Japan has been able to manage the outbreak without an extreme lockdown. I think the coronavirus situation in Japan will likely be short-lived.

 

What is your outlook for the Japanese economy?

The Japanese people can be highly innovative but may lack in creativity as they see the world generally in literal terms. Taking the Shinkansen (Japanese bullet train) as an example – it sticks to a schedule and always leave on time, to the minute. Rail companies’ internal schedules take this to an even higher level, where processes are down to the second. This demonstrates a literal application of precision timekeeping.

And because of this literal way of thinking, the Japanese may not be as adept in abstract thinking, including in finance. At times, the Japanese government would pursue financial and economic policies that may not be effective. One example of literal thinking is when the government attempted to fund its social security costs by increasing the consumption tax. But this direct way of problem-solving may instead stifle demand, which is needed to beat deflation.

The upside to such mindset is that the Japanese culture is good at innovation, taking something that exists and then making it better (versus creativity, which involves the use of imagination to create something new). They do that through long periods of intense focus, which is an area that sets Japan apart from most other countries. This is why some of the most innovative companies in the world are found in Japan.

The most interesting transition I witnessed in Japanese manufacturing was when vision sensors were added onto robots over 10 years ago. The movements of the vision-enabled robots were very slow when they first started. Over the years, they became faster and more accurate. Factories that use these technologies can operate 24 hours a day without stopping. This is because the robots do not get sick or take coffee breaks; they do not need to go home or require pensions. Such efficiency cannot be achieved with a human worker.

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
• Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.