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THE KEY VALUE OF JAPAN THAT ISN’T PRICED IN

After a decade of growth, many sense headwinds for the global economy in 2019. Geopolitical risk and trade tensions are just some of the factors slowing trade and investment. At such times it’s worth considering what are the safe harbors for investors, where capital does not only appreciate but also enjoys protection against downside.


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In the currency markets, a well-known haven is the Japanese yen. Yet, there is arguably more risk-management potential in Japan than its money – and that is worth exploring. Its record of recovery from disasters, both natural and economic, has instilled a resilience factor that makes Japan an intriguing investment proposition.

Take a recent example of disaster management and its economic consequences. In September last year Kansai Airport, Japan’s biggest hub outside Tokyo, was hit by the most powerful typhoon the country has seen in a quarter of a century. The disaster flooded runways, paralyzing operations. Yet, within 3 days the facility partially re-opened.

Was there damage? Of course. Natural disaster can strike anywhere and it is a known risk. What’s important, though, is how quickly a said place, company or asset can recover. Kansai Airport terminals were at full capacity in two and a half weeks.

Japan has a good track of remaining stable despite ongoing crisis. Its banking sector was relatively unscathed in the aftermath of the 2008 financial crisis. The Great East Japan Earthquake in 2011 was estimated as the costliest such disaster to date 1 , yet it barely dented the nation’s GDP.

Even after the collapse of Japan’s so-called bubble economy in the early 1990s, the local unemployment rate did not exceed 5.5 percent. Few companies folded. Overall GDP shrunk only for a year, in US dollar terms.

It is true, the event caused Japanese real estate values and shares to plummet. The recovery has made both assets stronger. The stock market hit a 27-year-high in 2018, while the period of lower land prices could be said to have helped incubate the startups that lead Japan’s economy today.

[1] Estimate from 2012 World Bank report, “Learning from Megadisasters” http://documents.worldbank.org/curated/en/811221468043499356/pdf/793520WP0JP0Ea00PUBLIC00Box03 77373B.pdf

ATTUNED TO THE ENVIRONMENT

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The reasons for this ability to bounce back are worth exploring.

Historically, Japan has had to be resourceful, relying on efficiencies and innovation to manage a major economy with limited natural resources.

Attitude too has played a role. In times of disaster, there is a greater calm and order in Japan than we’d expect elsewhere. Who can forget TV images of neat waiting lines and well- organized emergency centers after the record 2011 earthquake and tsunami?

The biggest factor, however, is surely a learned flexibility. This is not something most critics ascribe to Japan – especially to its corporate world. Here, again, evidence goes contrary to cultural stereotype.

As overseas rivals went out of business with the changing of the age, Japanese firms have often re-invented themselves in new domains. In the early 20 th century, local loom-maker Toyota decided to enter the car business. Now at the top of its industry, the company has set its sights on transforming into a general mobility provider, foreshadowing the next shift in mankind’s travel needs.

Fujifilm, once famed for its film and instant cameras, transitioned to digital photography, and later to healthcare and even beauty products.

Japanese companies, in general, might not seem like the fastest movers at first. For those with an investment span that exceeds a week or month, however, it would be curious to learn that over half of the world’s oldest enterprises, those in operation for over 200 years, are said to be based in Japan 2.

[2] Original research was conducted by Bank of Korea and published on May 14, 2008, as reported by The Korea Times. https://www.koreatimes.co.kr/www/news/biz/2008/05/123_24196.html

DNA OF ADAPTING TO CHANGE

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The way many Japanese describe it, there is an ingrained desire in business and society for gradual improvements to improve efficiency.

In terms of government policy, the most recent examples are the creation of National Strategic Special Zones and the adoption of a regulatory sandbox approach. The idea for both is to help free companies to innovate within a defined test environment and see if a new process is ready for wider application.

The above only really works when new technology is engaging with societal needs. So, it’s no surprise that many of the experimental ideas going through this process today are – potentially – products and services that could shape future society, in Japan and elsewhere.

Autonomous truck platoons on highways, due by 2022, seek to address a shortage of truck drivers as part of a whole new era opening in automated mobility services. Drone delivery, set to become reality in Japan over the next decade, will ease the burden on logistics and transport from booming online commerce, while empowering those living and working in remote locations.

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Online medical care, a service that aims to connect people with the best doctors around the country, is another near-future solution that should help overcome geographic isolation and make rural life more attractive. Consultations with medical, pharma and other specialists via video link at convenience stores is yet one more approach to the same being tested by private businesses.

Convenience stores are also leading the way in popularizing cashless payment to alleviate waiting times and make city living more orderly, less hectic.

Meanwhile, recent developments in NEC’s facial recognition software is both creating a way for consumers to pay securely without losing personalized care and a technology to patrol potential trouble-spots. The Made-in-Japan software is already helping to speed up and better regulate boarding at US airports; keeping order at fierce soccer derbies in Colombia; and weeding out fraudsters at gaming venues in Europe.

All this from a company that was focused on mobile phones in the 1990s, semiconductors in the 2000s, but leads the way in AI services today 3 . A very Japanese story of company that innovated while keeping a focus on its founding vision.

[3] According to a year-long study published in 2017 by the U.S. National Institute of Standards and Technology (NIST), part of the Department of Commerce, NEC’s software had the highest capabilities in facial recognition of 16 global vendors that were tested.

AGING SOCIETY AS THE NEXT OPPORTUNITY

Japan’s approach to new challenges is what hedges the risks of investing there, even at a time when most traditional economists like to play up its demographics as a fatal weakness.

The reality is, many countries are about to face the super-aging society era. Yet, not many are adjusting and moving towards solutions by introducing technology or processes to ease the physical and mental burden of labor, or by adapting living spaces in cities and rural areas to suit people of all ages, genders, and abilities.

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In recent years, Japan has also begun to overturn its social norms, empowering women to be more prominent in areas once seen as bastions of male dominion (such as in management4). There is a growing body of support for entrepreneurs and foreign talent 5 .

[4] In the last six years 2.9 million females joined the workforce and the proportion of women in managerial positions is increasing, according to the “Labor Force Survey” conducted by Japan’s Ministry of Internal Affairs and Communications

[5] The number of foreign professionals in Japan exceeded 1 million for the first time in 2016 and is currently at a record 1.3 million people, according to the Ministry of Health, Labour and Welfare data.

Aging society has acted as a catalyst for a Japanese resurgence in healthcare. The country boasts at least four major innovators in assisted wear and limb rehabilitation (Toyota, Honda, Panasonic, Cyberdyne). Progress in life sciences and pharmaceuticals has attracted global firms, from Philips to Bayer to Pfizer, all of whom are in various stages of collaboration with Japanese universities.

Japan’s more open approach to robotics has arguably helped it move ahead in future elderly care. SoftBank’s Pepper robot, criticized by some as a gimmick at its launch in 2014, is now on trial in hospitals and elderly homes in the UK and Belgium, as well as in Japan.

Which simply proves the old saying: where one person sees an aging crisis, another senses opportunity.

VALUES-BASED APPROACH TO FUTURE

One way to dissect the direction of Japan is through its national vision for a future society: it is one that will much closer embrace mobility, IoT and artificial intelligence. 6 Through that concept, which Japan calls Society 5.0 7 , people should find it easier to deal with issues such as information overload or appropriate data selection.

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[6] Government strategy for this is outlined in the productivity section of the “Abenomics” brochure, https://www.japan.go.jp/abenomics/productivity/

[7] Previous evolutions of society are recognized as hunter-gather; agrarian; industrial, and currently information society.

In simple terms, the vision is about recognizing the fact that our lives will change as we use more AI-infused technology, but not forgetting vital human qualities. As technology evolves, collaborations and partnerships are likely to remain our best way to yield socioeconomic progress. The big idea is to create a holistic social system that benefits all members.

When seen through an economics lens, that means support for free trade, respect for each other’s IP and resources. Japan has become arguably the most active proponent of free-trade, with TPP11 and the Japan-EU EPA entering into force respectively in December 2018 and February 2019.

This year and the next, Japan is likely to be in the international spotlight more than ever. It hosts the G20 and the Rugby World Cup in 2019, and the Olympic and Paralympic Games in 2020.

Visitors will likely encounter a culture that is steeped in tradition but with a young heart. Behind the polite, supposedly meek exterior, investors will also note a real momentum and strength that come from a cultured spirit of resilience, one factor Japan’s naysayers often neglect.

The country’s history and its present indicate this is a land where good investors reap what they sow.

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