Shigeru Aoyagi, portfolio manager for the Japan Value Strategy at Nikko Asset Management, takes a view.
Following the bursting of Japan’s 1980’s equity bubble, I have personally witnessed the many changes and challenges faced by the Japanese economy.
Japan’s economic downturn was so long that excessive pessimism prevailed, and its stock market has cheapened to levels rarely seen in other parts of the world. The share prices of many Japanese companies are at a discount although they possess attractive products, technological capabilities, and content.
Japan as a solutions provider
It has already been 30 years since Japan’s growth peaked, with the economy shifting to its maturity phase. During this phase, many innovations – all of which are top notch globally – have been created to solve the social issues that have arisen.
These innovations include: robot technology and environmental technology to supplement labour shortages; the world’s leading hydrogen value chain; power devices that contribute to power saving and CO2reduction of components in the electrification era by freely controlling current, voltage and frequency; and media and entertainment content tremendously popular with global youth.
We are confident that these innovations will be in demand amid the challenges that the world will face in the future and therefore will be monetised in many situations.
In the early 2000s, “Japanification” was a widely used expression, serving as a warning of what not to become. Time has passed and the global economy is losing momentum and gradually running out of new frontiers. Many countries and regions are facing some of the difficulties Japan experienced in the past as side effects of growth, including falling birth rates, declining working-age populations, harmful effects of urbani-sation, and environmental threats. Having dealt with these issues earlier, Japan is positioned to provide clues to others who are now lookingto solve these problems, and to also capture their demand.
We are strongly convinced that due to the cash flow created by these drivers, the Japanese stock market will surpass the Nikkei’s record high of 38,915 points set 30 years ago, in the near future.
Positioned for new geopolitical and economic realities
Recent developments such as the COVID-19 pandemic and the Russia-Ukraine conflict, have threatened to overturn existing global structures. The pandemic divided the world, challenging the concept of social convenience and efficiency based on borderless globalisation, and drastically changed the way we live. The Russia-Ukraine conflict also highlighted the existence of camps whose values differ from those of what can be considered the established structure.
Some countries and regions that rely on natural resources for their national revenues and have no other industrial base, or who believe that top-down controls and regulations are needed to maintain their social systems, likely favour such values. The struggle between differing sets of values will be prolonged, in our view.
Instead of a borderless and globalised economy, we may consider the possibility of a completely contrasting development. Security risks may promote armament and energy-related infrastructure investment at the national and regional levels. At the civilian level, these risks may create incentives to deliberately invest and build production activities and information infrastructure within a limited area; they may also promote research and development in clean energy, such as hydrogen, to replace fossil fuels.
Rising inflation can prompt companies to reduce intermediate costs such as those related to energy and distribution networks and relocate their production bases; it can also encourage consumers to move to areas where the cost of living is cheaper. Within such a shift to a “local production for local consumption” type economy and increasing global divisions, free trade and expansive economic partnerships that utilise regional alliances are expected to play an important role. We expect such developments to accelerate in the future.
Many of the current events impacting society also represent business opportunities borne from the transformation of economic structures – and we believe Japan has a critical role to play. Japan’s own growth potential is limited, and the country still faces challenges. However, after overcoming many difficulties, I believe Japan has finally reached the light at the end of the tunnel. As an asset manager, nothing would be more satisfying than to see investors view Japan as a valuable presence within their portfolios that enables them to greatly capture growth opportunities across the wider Asia Pacific region.
This content is part of a new investment guide from Nikko Asset Management.
