One theme in which Japan surprisingly lags the global curve – and that has advanced rapidly in the pandemic - is digitalisation. One cause is the sudden change to remote working. While UK workers transitioned smoothly from office to home, many Japanese employees could not work from home because their companies lacked the required cloud technology. Companies found themselves saddled with expensive-to-maintain proprietary software. As a result, Japan’s SMEs have embarked on the largest investment in IT infrastructure for 20 years. The Trust is benefiting from this revolution thanks to its position in OBIC, provider of standardised IT supplies, systems and support; and NRI (Nomura Research Institute), which has grown from a boutique financial IT specialist to become Japan’s leading consulting and tech solutions provider.

A further signifier of Japan’s surprising recalcitrance to 21^st century technology is that, remarkably, most legal documents were until very recently still legally required to be physically rubber-stamped. The necessary migration to remote operations has forced companies to permit electronic signatures. With its cloud accounting services and e-sign product, trust holding Bengo4 is a direct beneficiary. 

Behind Japan’s high-tech image lies rubber stamping, faxing, and a low penetration rate of e-commerce and cashless payments. Pre-pandemic, only 24% of payments were cashless (compared with 90% in South Korea¹), but this is starting to shift with the migration from bricks-and-mortar to online shopping, which made up a mere 13% of retail sales in 2020.² The Trust holds strong positions in these themes, such as GMO Payment Gateway - the country’s largest cashless transaction processor and a holding since 2015 - and Shopify-like freemium e-commerce platform, BASE.

The transition to the online sales model has wider beneficiaries; for example Nippon Prologis, a REIT (real estate investment trust) that directly invests in properties used for logistics businesses and B2B industrial products supplier MonotaRO, a 3.6% holding with the strong growth fundamentals that characterise the portfolio, also performed strongly during the pandemic.

The pandemic not only increased home-working, it also increased participation in at-home leisure activities. A theme that will surely resonate with many a locked-down family, gaming is another area with Japanese associations that is, surprisingly, behind other developed markets - and thus, exciting potential. Famous Japanese companies such as Nintendo boast world-beating intellectual property in global products such as Pokémon and pandemic hit, Animal Crossing, yet they lag in monetizing profitable online content such as downloads and in-game purchases. 

Healthcare is an obvious pandemic growth sector. Japan’s ageing population is a well-known societal theme, but Japan lags on the telemedicine curve. Government deregulation legalising the marketing of drugs to doctors is good news for portfolio holding, M3, while online life insurance disruptor Lifenet saw sudden take-up during the pandemic.

An ageing workforce coupled with the need for physically distant practices (and increased domestic production) benefits Japan’s world-leading automation companies, such as Osaka-headquartered Keyence, which develops and manufactures factory automation systems and products. At 6.1%, Keyence is the largest portfolio holding, and has been for over eight years. Long highly profitable (its operating margin is over 50%), benefiting from societal changes, and still with an extensive growth runway, Keyence embodies the JFJ strategy.