Land of the Rising Sun
It’s been a long time since Japanese companies received much love from investors. Even as Asia has become the investment destination for both retail and institutional investors looking to get a piece of the region’s growing economic prosperity, most funds make it a point to avoid Japan, a country that’s struggled with deflation and a weak economy for decades. But Neil Hennessy, portfolio manager and chief investment officer of Hennessy Funds, makes the case that that Japan is undergoing a structural transformation that will alter the face of the Japanese government and the way the nation does business.
Why Japan and why now?
The exact same question went through my mind: Why? You can’t find an uglier chart. The Japanese market has been down for 20 straight years, so you can’t blame people for not being energetic about its prospects. But you have to remember that you’re buying global companies headquartered in
If I look for value names in the
The last time I saw that was March 2008, when you could buy a dollar of revenue for 60 cents on the Dow Jones Industrials.
In the BRIC nations (
It’s true that over the last 10 years the BRIC markets are up 465 percent, while Japanese equities are down 41 percent. And quantitative measures don’t paint a pretty picture: the population is aging, the workforce is shrinking, fewer babies are being born and the country is saddled with debt. None of these stats inspire confidence.
Why would I want to invest in Japanese equities? Two major shifts are underway in the country.
The first factor is the change in government that occurred last year.
Although there have been a lot of false starts with new governments over the years, this is a really proactive government that wants to see Japanese companies to do well globally.
For instance, the government recently had representatives in the
The new government also wants the economy to be a bit more consumer driven. It also wants tourism to multiply to four times its current level. Right now, about 6 million tourists go to Japan annually; they want to increase that number to 25 million people. Only 125 million people live in
One of the interesting parts is that
Up until recently, the Japanese government required a Chinese citizen seeking a visa for anything other than business or governmental purposes to travel with at least four people and a tour guide. But as of July 1, if a Chinese citizen makes approximately USD35,000 or more a year in
The other major story is that Japanese corporations are changing.
Until the early 1990s, the government controlled the banks, and the banks controlled the public companies in which they invested because they were their clients. Other shareholders were just sort of dangling out there.
Then came the banking problems in the late ‘90s and early 2000s, when the major banks had to divest liquid assets to shore up their books.
What where those liquid assets? Shares of public companies, many of which were sold to foreigners who demanded much higher returns on their money.
That’s forced Japanese companies to become more transparent, more open and more shareholder friendly. This shift is driving a desire to generate higher profits and to pay dividends.
The Wall Street Journal recently ran a big story about the fired president of Fujitsu (
The company had a board of nine people who refused to talk to the reporter, but the displaced president stated that he wanted to close unprofitable businesses and remove layers of middle management.
That’s an enormous cultural shift for the Japanese; the board didn’t see things his way, leading to his dismissal. The deposed president has sued Fujitsu for wrongful termination—an unheard of step in
Sony Corp (NYSE: SNE) is another example of this cultural shift. The electronics giant has struggled to make its manufacturing plants profitable, so management sold two television plants to a Taiwanese company.
And consider Nippon Sheet Glass (
The Japanese view of business is clearly changing, and these companies are shifting to become global enterprises. Disregard all the negatives associated with
The game of employment for life is over, the bureaucratic government is gone, the old-boy network is gone and
How competitive can Japanese companies really be in export markets? Can’t other countries in the region produce goods more cheaply?
Over the past 20 years the Japanese market had a lot of false starts because many investors assumed the Chinese and Indians would purchase a lot of consumer goods. But households in these emerging markets bought the necessities—not lifestyle products.
Now consumers in
This sounds simple, but it has bullish ramifications for companies like diaper-maker Unicharm Corp (
Now Chinese families want diapers, bottles with nipples on them and feminine hygiene products—all simple products that enhance quality of life. Now that the Chinese are becoming wealthier, they’re buying more and more of these things.
If you think about
Now our markets are saturated, but the huge number of new Asian consumers is a massive opportunity for Japanese companies.
And Chinese manufacturers can put out a lot of units, but the quality is lacking. That’s an issue as Chinese consumers become more discerning.
Are there any key industries that investors should consider?
In the 1960s
Many of
What’s the biggest reason for investors to look at
As the Japanese market turns the corner, its performance will resemble that of emerging markets. Why take on the added risk of investing in emerging markets that can be fraught with criminals and fraud?
Although
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