Japan’s turnround still underrated by investors
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The writer is Head of Investments for Japan at Fidelity International
In Japan, the stable and steady expansion since Abenomics was launched nine years ago has felt like a sea change from the 20 years of economic stagnation that preceded it.
The economy added 5m jobs, companies boosted capital expenditure as profits rose and, on the whole, the country has returned to growth. The Nikkei 225 has trebled in value over the past decade.
It is a real turnround story. Yet Japanese equities are an asset class that remains underrated and under-owned by international investors.
With a vote next week to select the next head of the ruling Liberal Democratic Party and Japan’s new prime minister, the priority for the incoming leader is making sure the country continues the turnround.
Perhaps the biggest risk to the LDP in national elections later this year is that of a potential backlash from voters fatigued and frustrated by what they see as a slow response to the pandemic by the outgoing administration.
Indeed, Japan is still navigating short-term disruptions from Covid-19. Over the longer term, to keep the economy on an even-growth trajectory, there are three key areas where progress is vital.
Monetary policy was the initial keystone of the past decade’s economic support, but fiscal support needs to do the heavier lifting for the next stage of growth.
Japan Inc sits on one of the biggest corporate cash piles around. As the nightmares of deflation recede and structural wage increases look likely, the conditions are in place for a shift in management thinking about spending.
Increasingly, investing for the long haul looks like the most sensible option. But to encourage this transition and unlock the growth that a new wave of corporate capital expenditure can spark, the next administration must build on the supportive fiscal measures of recent years.
This requires greater tax incentives to promote growth in targeted areas, including digital innovation, and improving corporate performance along environmental, social and governance lines.
A second area of focus for the government should be accelerating the green transition. Outgoing prime minister Yoshihide Suga started the clock ticking in October last year, when he used his first policy speech to make a surprise pledge that Japan would aim for net zero greenhouse gas emissions by 2050.
But it will fall to the next prime minister to ensure the country is on target. As the world’s third-biggest economy, Japan has a leading role in the battle against global warming, but without greater buy-in from companies and investors it will fail.
Investors need to increasingly engage with companies, using shareholder votes to ensure that managements live up to their commitments on decarbonisation and related areas. Companies appear receptive already.
A third priority area for the government should be narrowing the gender gap. Apart from societal benefits, this would also bring tremendous broader economic benefit. Shinzo Abe’s administration put the gender gap on the agenda early on but progress has come in fits and starts. Japan still lags, with a gender pay gap that ranks as the second-worst in the OECD.
Simply put, Japan’s traditional “male dominant, lifetime employment” mindset is anachronistic. In May, we sent letters to hundreds of companies in Japan to set our expectations. This includes 30 per cent female representation on corporate boards and management by 2030, 30 per cent female representation among all employees by the same year and gender pay gap disclosure (not currently mandated or standard practice in Japan).
In my conversations with overseas investors, I am often surprised at how they have missed many of the positive changes of recent years. Sure, international investors pay more attention to Japan’s markets when the yen is relatively weak, but this is a tactical approach that does not recognise what’s fundamentally a legacy “underweight” exposure to the country.
Regardless of who is the next leader, it’s the corporate sector, not policymakers, that is key to Japan’s economic development. The next administration must ensure that companies feel confident and incentivised to deploy capital expenditure and foster innovation; it must mandate female representation and gender equality at the highest levels of management; and ensure a greener and more sustainable economy. This is the Japan of the future.
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