One of the most often used arguments for not investing in Japan is its weak demographics, however we believe there are companies that can take advantage of the country's ageing workforce.
While the fact that the population in Japan is getting older is undeniable, with many of the nation's so called baby-boomers about to hit retirement, the demographic shift is not just about ageing. Ultimately it is about the shortage of younger people, and a key question is how can businesses adapt?
The most obvious sector that can offer solutions and capture opportunities from weak demographics is the health care sector. This is for the simple reason that as Japan gets older there will be a natural increase in demand for health care. Japan has one of the largest health care markets in the world, and companies that can revolutionise health care, for example through health care technologies, stand to benefit.
Meanwhile as labour becomes both more scarce and expensive going forward, corporations in the manufacturing sector and other parts of the economy are offsetting soaring wage bills by becoming more automated to boost the productivity of their work forces.
For example robots have long been used to supplement the country's ageing workforce. This is favourable for related businesses over the next decade because automation and robotic penetration in China and the rest of Asia remains low compared with the more advanced countries like Japan, Germany and Korea.
With more people leaving the workforce the cost of hiring employees is also going 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 capitalise on this trend over the next five-to-10 years. For example as companies grow and people become harder to hire, company management are likely to outsource their non-core operations, such as human resources, to specialist providers.
Service businesses occupy a growing share of the Japanese economy, but they remain a minority among listed companies. This, in part, is because of the fragmented nature of the 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, despite the strain on the workforce by the number of older people leaving it, Japan's younger generation is enjoying the fruits of having more money in their pockets that rising wages brings. This goes hand in hand with rising consumption and one area we believe could benefit is e-commerce.
Right now Japan has the fifth-largest number of internet users in the world, yet e-commerce penetration is still at relatively low levels. In 2015, retail e-commerce sales accounted for approximately $89bn, or up to almost 7% of total sales. By 2019, this is forecast to reach $134bn billion and 9.7% respectively.
However it's not only via e-commerce that we see more demand for Japan's products and services. Over the past few years, the country has experienced significant growth in inbound tourism as a result of rising household incomes in Asia, and supportive government policies such as visa relaxation.
A large portion of these tourists are coming from China, but it is also growing in broader Asia, and Japanese companies are benefiting from the tourism spend. In 2015, Asian countries made up four out of the top five spending nations in Japan, with China taking the lion's share by a large margin.
Finally, a point which is often overlooked is that listed companies in Japan remain 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 tend to be 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 are likely to profit.
To learn more about how we capture all-cap growth opportunities in Japan visit global.matthewsasia.com/japanfund
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