INDUSTRY VOICE: At first glance, Japan appears to be in a sweet spot. A combination of structural reforms, a stable political environment and consistently easy monetary policy has revitalized the country's economy since 2012. The country has also become a more attractive investment destination due to changes in its corporate governance requirements.
Japan's economic growth, meanwhile, is starting to show sluggishness. Annualized real GDP growth during the last quarter of 2017 was 1.6%, but those figures were supported by inventory build-up, which could result in issues over the coming quarters. Business investments and private consumption remain solid but we believe a contraction in net government expenditures will lead to slower growth this year.
A weakening economy, however, does not mean an absence of investment opportunities. At Matthews Asia, we have invested in Japanese equities for more than 19 years. We know Japan is home to many growth companies that benefit from growth at home and further afield, and that can adapt to the next stage of Japan's economic development.
Global demand for Japan's world-leading technologies, services and products continues to grow. We have observed a deepening integration of the Japanese economy with the rest of Asia and most notably China. As incomes in the region grow, local consumers increasingly can afford Japanese brands that are associated with quality, thereby creating a market for Japanese brands that previously did not exist. On the flipside, companies in Asia are under greater pressure to pay higher wages. As a result, businesses have been forced to adopt more technology into their processes to drive productivity and protect profit margins.
In addition, China is investing heavily in upgrading its manufacturing sector as it seeks to drive technological innovation. We firmly believe it can lead to tremendous growth opportunities for select Japanese companies and we will continue to focus our research efforts on identifying these opportunities.
Japan's labor market is very tight and immigration cannot solve this imbalance. Wages for part-time workers, who comprise approximately 40% of the workforce, are rising at approximately 2% this year. We do not wish to overstate the argument that consumption will grow substantially because of these wage increases, but we do see tangible evidence of reflation as a result of these supply-side dynamics.
Companies that relied on stagnant wages during Japan's lost decades between 1990 and 2010 are struggling now and we expect to see some of them exit the market. Companies that are more productive and can afford to pay their workers more will enjoy a "survivor's benefit" as they consolidate market share. We believe that listed companies may see an improvement in their pricing power as they gain market share from smaller unlisted companies.
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Source: Japan Ministry of Health Labour and Welfare