We recently returned from our fourth Japanese conference within the past year, where we engaged with several dozen companies. Given the “widow maker” reputation of the Japanese equity market over the decades, we are particularly careful in our approach. Although near term uncertainties remain, we believe there are discernible pockets of optimism and growth underpinned by several structural trends.
Impact of the accelerating demographic shift
While Japan’s aging population trend is not new, its impact on the economy is becoming increasingly visible. The working age population in Japan is now declining by approximately 700,000 people per year, constituting about 1% of that demographic segment, a critical rate that has wide-ranging implications. Moreover, projections suggest that by 2025, one in three individuals will be aged 65 or older, with one in five being 75 or older. Almost all the companies we met told us about the labor challenges they are experiencing and the ensuing need to revamp their HR process. We had very productive meetings with companies which are poised to benefit directly from these trends, and that are mainly involved in healthcare and elderly care recruitment, facility operation, and technology-driven productivity improvements.
Market reforms are having a significant and positive impact
The Japan Stock Exchange mandates listed companies to enhance corporate governance, bolster earnings, unwind cross-shareholdings, and prioritize long-term shareholder returns. This regulatory impetus is driving increased merger and acquisition activity, which surged by 23% year-on-year in 2023. We heard multiple comments that confirm to us that the M&A and general capital markets activity momentum remains solid for 2024. Additionally, dividend payments have reached record highs for the third consecutive year, totaling 15.2 trillion yen in the latest fiscal year, alongside record share buyback programs amounting to 9.6 trillion yen. Financial institutions offering advisory or financial services to facilitate these reforms are witnessing heightened demand for their expertise, further fueling their growth.
Technology catch-up is unlocking value
Japan has historically led in sectors like robotics and semiconductors, its adoption of certain technological advancements lagged other developed nations. However, there is now a notable uptick in the adoption of e-commerce, cashless payments, and digitalization across business and consumer processes. Despite progress, Japan still has significant ground to cover compared to its counterparts. For instance, the percentage of consumers engaging in online purchases weekly is below other developed markets by 10 to 28%, and Japan’s penetration of cashless transactions is approximately 40% compared to levels of up to 80% in other developed countries. It was clear to us from our discussions with executives that the deployment of technology is one of their top priorities. Companies are actively pursuing digitalization initiatives across multiple years, benefiting sectors such as e-commerce, fintech, software, and network & systems providers.
Within this exciting and challenging environment, we have identified numerous areas for growth and value creation. We favor companies addressing key structural issues and those capitalizing on Japan’s digital transformation. Following our latest trip, we remain optimistic with regards to the many secular trends that are propelling the Japanese economy and are committed to our rigorous investment process in identifying the most promising companies for our portfolios.
