Capital Ideas^TM

A curtain of gloom appears to have descended upon Japan as its economy is put to the test by a slew of challenges. Topping the list is the deadly COVID-19 pandemic, which dragged the already weakened economy into recession and postponed the Tokyo Olympics to July 2021.

Amid the gloom, however, there are some bright spots. Japan has high domestic savings (24.7% of GDP in 20181) and is considered by some people as a safe-haven market because a significant amount of money is kept within its borders. Consequently, the Japanese yen has been fairly stable during recent volatility, whereas many other countries are experiencing the double whammy of a weakening currency and a falling stock market, especially in US dollar terms.

Corporates listed in Japan are sitting on a huge cash pile (¥506.4 trillion in 20192). This is in stark contrast to global peers and is proving once again that cash can be king in troubled times. Having a robust balance sheet is particularly important during economic downturns as it provides companies with a stable platform to make strategic moves and increase market shares. In other words, such companies could potentially come out of recession faster and stronger.

A stock picker’s market

Many Japanese companies today have globally competitive businesses, with some among the best in areas such as automation, mechatronics and precision manufacturing. The country’s growing prowess in automation technologies, in particular, has been driven by an acute need to combat the negative effects of a shrinking and ageing population.

Recently, investor focus has turned to those companies well positioned for the future, as the world adapts to a new normal – an environment of changed trade patterns triggered by disruptive technology and new consumer behaviours borne out of the COVID-19 pandemic. The sudden increase in the need for remote working and teleworking created strong demand for networked, personal computer, tablet, software and cloud services. Japan offers competitive companies in all these fields.

But having the right business, product, service or technology is only part of the equation. Many Japanese companies are actively improving their standard of corporate governance in response to the Corporate Governance Code, which was introduced by the government in 2015. While it will take time for companies in Japan to fully understand and reap the benefits of good corporate governance, many are moving in the right direction through dividend increases, share buybacks and better balance sheet management.

Given the dynamics, Japan is a classic example of a stock picker’s market where bottom-up research can help to uncover bright spots – exciting businesses that are globally competitive and are well-positioned for the new normal.