Investment Week – Nov 15, 2016 – When Japan’s demographic profile is used as an argument against investing in the country, it is natural to think of the nation’s ageing population. However the demographic shift that the nation is undertaking is not just about ageing. Ultimately it is about the shortage of younger people the country is facing and there are many companies that can potentially benefit from this change.
By 2025, Japan’s working age population is forecast to decrease to 71 million, a decline of 8 million over the course of 13 years. A key question is: how can businesses adapt to this shift? Robots have long been used to supplement the country’s aging workforce. For example robotic caregivers complement human staff in nursing homes and humanoid robots fulfill customer service functions. Soon visitors arriving at Tokyo’s Haneda airport will be welcomed by a fleet of tiny humanoid robots. But beyond robots, there are companies that can offer solutions and even benefit from Japan’s shortage of younger people.
A consequence of a shrinking population is that the cost of hiring employees is likely to rise in the medium term. Companies that can provide services to make businesses more efficient, such as B2B services companies, are well-positioned to capitalize on this trend. As companies grow and people become harder to hire, companies are seeking to outsource non-core operations, such as human resources, to specialist providers. Indeed other services to companies could be outsourced, such as the procurement of every consumables such as paper, ink and toners, or if you operate in the manufacturing sector the purchasing of gloves and lubricants. We think this penetration still has room to increase as labour becomes both more scarce and expensive going forward.
Rising wages – pushed up by a tight labour market- tend to go hand in hand with rising consumption. One area that we believe could benefit is e-commerce. Japan has the fifth-largest number of internet users in the world but e-commerce penetration is still at relatively low levels. In 2015, retail e-commerce sales accounted for approximately US$89 billion, or up to almost 7% of total sales. By 2019, this is forecast to reach US$134 billion and 9.7% respectively. In addition to increasing sales, we believe there is scope for productivity gains through warehouse automation.
Finally, while service businesses currently occupy a growing share of the Japanese economy, they are a minority among listed companies. This, in part, is because of the fragmented nature of many Japanese markets, where leading companies tend to only control a 5% or 10% market share. We believe this may change over the next decade, in part due to demographics. As business owners retire, they will sell up to their competitors or exit the market, lacking any successors to the business.
Meanwhile, what is often overlooked is that listed companies in Japan are still just a subset of the overall economy. Not all companies are listed on the stock market, but those that are tend to be the larger businesses with better pricing power. They are more productive and over time, if listed Japanese companies can consolidate market share, their profits can grow, even though the entire profit pool for the country may not be growing. Companies that can use their capital efficiently should profit.
Japan will always be dominated by discussions about macroeconomic, political and regulatory headwinds. These are things outside of our control. What we can control is our analysis of a company and avoiding areas of the market that tend to be sensitive to cyclical ebbs and flows. We believe there is a new generation of Japanese companies that can take advantage of the changing product and service needs of both consumers and businesses. Long-term investors should take note.
To learn more about how we capture all-cap growth opportunities in Japan visit global.matthewsasia.com/japanfund