The future is looking brighter for Japan. It is recovering from the double trauma of recession1 and coronavirus. Consumer spending continues to pick up after 2019’s consumption tax hike hit GDP hard; the country’s handling of the pandemic has been relatively successful. There is good reason for optimism but investors must focus on themes with the greatest growth potential. JP Morgan Japanese Investment Trust portfolio manager Nicholas Weindling believes that while these themes will still play out over the next decade or longer, coronavirus has accelerated them. This offers real opportunities for the informed investor.
Coronavirus has accelerated changes in Japanese ways of working. Weindling, who like many Tokyo residents worked from home during the city’s lockdown, says that many Japanese companies are under-invested in the IT required for remote and flexible working, and are saddled with proprietary systems that are increasingly expensive to maintain. The trust looks well placed to profit from companies’ need for greater IT investment thanks to its position in OBIC, a highly profitable company which provides standardised systems and support for SMEs.
The change to cashless
Another trend that coronavirus has accelerated is the increase in cashless transactions. In Japan, 76% of transactions are in cash2 – versus a global average of 60% and just 10% in South Korea3 . The Japanese government had already committed to meeting the global average by 2025 but coronavirus-heightened hygiene concerns around handling money will hasten the change. Trust holding GMO Payment Gateway, the country’s largest cashless transaction processor, is in prime position to benefit.
Commerce goes online
Lockdown also set in motion a shift from brick-and-mortar spending to online transactions – in both B2C and B2B. Portfolio beneficiaries of ecommerce growth include Uniqlo owner Fast Retail, with its rapid online sales growth, especially outside of Japan, and in B2B, MonotaRO. The online supplier of office supplies and manufacturing products (including PPE) already has over a million customers. Its excellent sales growth during the crisis period, and investment in future growth, bodes well for the trust.
New horizons for gaming
Gaming is another sector reaping the rewards from the switch from physical to online purchasing, for game downloads are more profitable. Coupled with gaming’s popularity surge among families looking for lockdown diversions, this has translated well to the trust with its positions in companies such as Square Enix, Capcom and Nexon. The highest profile holding to benefit is Nintendo whose family-friendly ‘Animal Crossing: New Horizons’ was the global gaming smash hit during lockdown.
A major existing issue in Japan is its shrinking workforce. Alongside increased female participation, returning retirees, and (to a limited extent) the relaxation of immigration and work visa policies, automation and robotics is a key solution to the problem. It’s already a multi-year trend - for example, Fast Retail’s new Tokyo distribution centre requires only 10% of the staff needed to operate its previous facility. Coronavirus has accelerated the trend: as well as reducing labour costs and increasing efficiency, robotics also solves the manufacturers’ need to socially distance their workers. One company leveraging the automation revolution is Keyence, global number one manufacturer of factory production line sensors – and the trust’s largest position. Keyence boasts a competitor-beating operating margin of over 55% and maintained its robust performance during the recent slowdown.
A highly visible effect of coronavirus on Japan has been the 99.9% drop in overseas tourists4 . Retail is one of the largest areas of spend by visitors from Asian countries, especially China. However, says Weindling: ‘The fact that tourists from these countries aren’t coming to Japan doesn’t make that much difference: they’ve developed loyalties to Japanese brands; now they’re simply buying these quality products back home.’ Brands such as functional skincare company Shiseido have a firm place in the trust as well as in consumer hearts.
The JPMorgan Japanese Investment Trust offers investors exposure to Japan’s most exciting growth themes. The trust’s stock selection and sector allocation have helped it perform strongly throughout Japan’s slowdown and position it well to reap the rewards of Japan’s recovery and beyond.