Kenichi Amaki, Portfolio Manager, Matthews Asia
The Japanese economy is still struggling to shake off decades of moribund growth and deflation, but we believe investors should not disregard the benefits of Abenomics.
First of all, the rule of Prime Minister Shinzo Abe has brought an end to years of revolving-door government. Now there is political stability in Japan, a solid base if you are going to invest in a country.
Monetary and fiscal policies are very supportive and we have seen some progress in structural reforms such as the recent electricity market deregulation. But we believe the biggest change has been seen in corporate governance attitudes.
Investing in Japan has become more attractive following changes to corporate governance requirements in 2014. Returning cash to shareholders by paying dividends and conducting share buybacks is one key component of improving governance, and that has been going well.
Although it is on the back of strong profit growth, dividend payouts in Japan are at a historical high and we have seen share buybacks increase quite a bit as well.
Of course, improving corporate governance in Japan is not simply about dividends or share buybacks. In the long run, it's about improving capital returns and capital allocation. We want to find good stewards of capital.
Over time businesses are going to be challenged, environments will become difficult; the companies that can survive with less volatility will be those with a quality business that can deploy their capital efficiently.
Today when I visit Japanese companies, they are talking about shareholder returns, balance sheet management and capital efficiency - not things that Japanese management used to think about as much in the past. It's a significant change but not one that will produce results instantly. Improving capital returns and capital allocation is an area we believe will play out over a five to ten year time horizon.
Compared to other markets, Japan's is fragmented. In many industries, leading companies only control 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 if there is no successor 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 in Japan. They have better pricing power. They are more productive. 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.
Historically Japanese companies have been less aggressive moving overseas than, for example, South Korean companies in Asia, simply because their home market has been larger than South Korea's.
Today, the Japanese companies we talk to are well aware that their mother market is not going to grow and they're putting their incremental investment into growing their overseas business. These are not just large companies, but also medium-size and smaller companies. Again this change in capital allocation can potentially benefit investors.
The focus on overseas growth is different today than it was in the 90s or early 2000s. Back then it was about moving factories to China or Thailand because it was cheaper to produce goods there, but the end market for those goods was still Japan and the US. or Europe.
Today, it's about targeting growth within China, or targeting the consumer in Thailand. That is the model of growth that we expect to see going forward, because households in those markets are much richer than they were 10 years ago. We think Japan is looking at a huge opportunity in the rest of Asia.
Change can be a powerful driver of growth. We see more and more Japanese companies that are taking advantage of growth opportunities in domestic and global markets where businesses and consumers have new product and service needs. These are the types of companies that we believe will benefit.
To learn more about how we capture all-cap growth opportunities in Japan visit global.matthewsasia.com
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