• Fertile ground for investing in world-class companies despite domestic economic challenges.
• Companies have expanded overseas to find growth and are geared into the consumption of Asia’s rising middle classes.
• Innovation powers global leadership in robotics and other automation technologies.
• We are encouraged by signs of progress as we engage company managements to help improve returns.
Japan is home to a plethora of world-class companies in spite of the harsh economic realities of recent years—making it fertile ground for global investors seeking returns.
The nation’s aging and shrinking population impedes policymakers in their efforts to effect economic growth. But we have found companies that have survived and thrived in this environment by making themselves leaner, more efficient and more productive. The best among them are leading players in their industries and are global. They have transcended borders.
If necessity is the mother of invention, Japan is at an advantage. Streamlining and restructuring can drive profitability in addition to top-line growth. Local companies have also had to look overseas for growth to lessen dependence on the domestic economy. Those with industry-leading positions have pricing power. Those with global production lines can benefit from risk diversification. It means Japanese companies can often be found operating in higher growth emerging markets.
One example of such companies is a maker of baby bottles and products, which is geared into the rising middle classes in China and Southeast Asia. Just one million babies are born in Japan each year, while 15 million were born in China last year, which is the company’s major market.
More broadly, Japanese companies have proved adept at building good consumer products with strong brands that have resonance across Asia. They have established a reputation for high quality —which means their products can be priced at a premium.
The tough domestic backdrop has also inspired a bold approach to innovation. Japan leads the world in certain automation technologies. Some are borne out of the country’s car industry, including firms that manufacture quality-control sensors, which cut down on costs and defects. But it is in robotics where Japan leads the world. There is unrelenting demand in countries such as China, where manufacturing automation is key to saving on rising labor costs and improving product quality.