A Yen for Investing in the East

Abenomics could mean higher exporting revenues for Japan, more tax revenue and better wages to stimulate the economy.

Japan has undergone mixed blessings in the last few decades. After a post-war economic surge, the 1990s were dubbed the ‘lost decade’ after the bubble burst, the Tokyo Stock Exchange crashed and property prices rocketed.

As its less developed neighbours surged ahead, the 2011 Fukushima nuclear power plant catastrophe, when widespread radioactive contamination was caused by an earthquake followed by a tsunami, seemed to spell the worst—that Japan would become an economic pariah. But the exclusion zone predicted by pundits failed to materialise and Japan has been resurgent over recent years.

What is behind it is the cause of much debate in financial circles and has been dubbed Abenomics, a portmanteau of economics and the name of the country’s polarising prime minister, Shinzo Abe. Just months after coming to power for a second term in December 2012, Abe – who had previously held the post for a year in 2006 – managed to steer the country’s economy from negative GDP growth to 1.3 per cent.

He has done so by going on an inflationary offensive, printing money, undergoing quantitative easing and promoting public spending. The lack of sustainability of this move may be showing through with Japan recently undergoing a period of deflation.

Despite this, many see Japan as a solid bet for investment opportunities. Japan’s stock market has risen 36 per cent over the past year. The yen has fallen significantly, dropping almost a third against the dollar, a boost for Japan’s export sectors.

Dr Jochen Legewie, who has a doctorate in economics and is head of international communications consultancy CNC for Japan, says investment opportunities exist for outsiders but in “specific sectors and regions where Japan is still growing and having a big demand”.

Legewie, the only foreign member of the Foreign Direct Investment (FDI) task force of the Japanese business federation Keizai Doyukai, says the best investments relate to macro trends such as Japan’s ageing population and expanding megalopoli.

Luxury goods like fresh vegetables and healthy food are in demand, he adds.

While Japan has a decreasing population, its big cities are actually growing, with wider Tokyo’s approximately 36 million people representing the largest agglomeration in the world.

“Areas related to city infrastructure and improving the quality of the transport, the energy – even the entertainment area – will continue to grow,” he says. It also means prime property in high density areas is “very hot”.

Legewie says he expects these sectors to continue to perform strongly for investors until Tokyo’s 2020 Olympics, which is the focus of much development. But even after that, the country should be in good stead, he says, thanks to blossoming tourism, another bonus from the low yen.

Two years ago a target of 20 million overseas visitors was set for 2020. However, he says that could be reached by this year.

“They are a big shot in the business arm of Japan. These richer Chinese plus further foreigners are not going away, whether the domestic economy after the Olympics increases or not.”

But Legewie also foresees major challenges. The Japanese economy and the nation’s industries need to focus on integrating better in the global market to avoid the “Galapagos effect” that has grown in Japan, thanks to its island mentality and historic self-sufficiency. He also says a look at Japan’s non-existent immigration policy is key to increasing productivity.

David Norton, head of investments at wealth management firm AES International in Dubai, agrees there is potential for investors amid the “doom and gloom” coverage of Abenomics.

He says Standard and Poor’s index of the US’s top 500 investable companies has risen by a factor of 37 since 1980 while Japan’s index has only risen three times, suggesting a lot of room for movement for the world’s third largest economy.

“Japan is a complicated picture but the government-led reforms suggest there are lots of opportunity for investment growth,” he says.

Norton adds opportunities in Japan are about investing in companies rather than the country.

“The multinationals are those benefitting from the weaker yen so areas such as advanced materials, engineering, electrical and electronics [are worth investing in]. Others to watch are those supported by Government spending—defence, construction and industrial materials.”

Both Norton and Legewie agree the technology industry Japan was once famed for has largely passed to Korea and China in terms of consumer products, although Japan is still a robotics hub. However, Legewie says Japan remains a powerhouse for manufacturing the electronic components at the core of these products. Big strides are also being made in the direction of smart cities with self-driving cars and link-ups between technology companies like Google and IBM and the Japanese car industry.

But any serious foray into Japan’s business sector takes commitment. UAE-based shipping logistics and compliance company Marcura set up shop in Japan in 2014 after a lengthy period securing quality local staff to break into the conservative market, according to parent company DA-Desk’s managing director Hans-Christian Mordhurst.

“Engaging Japanese companies from abroad without visible investment in, and commitment to, the Japanese market is in my experience not likely to be a sustainable success,” he says.

Theirs has been an investment worth making with the new Japanese arm breaking even within the first year – much better than anticipated, he adds.

“We have two of the largest trading companies and several of the largest shipping companies as customers. These are important credentials since many Japanese companies adopt a wait-and-see approach when new products are introduced.”

Being based locally gives advantages in understanding the business culture. Decision-making can seem “opaque”, there is a high expectation of service levels and Japanese customers want to work in their own language.

This might make business growth seem slow at the outset compared to a market like Singapore, says Mordhurst, but in Japan quality is rated over price and “customer loyalty goes deep”.

Marcura is hoping to double its business by the end of next year.

As for Abenomics, Mordhurst says he is not concerned about Japan’s aggressive monetary policies and its sovereign debt level of about 250 per cent, which is higher than that of Greece, for example.

As Legewie points out, the sovereign debt is almost entirely domestically owned, as opposed to being indebted overseas in Greece’s case.

And Norton says the sovereign debt is part of the gamble Abenomics has taken—one that could pay off in the long run. The weaker yen should lead to higher exporting revenues, giving more tax revenue and higher wages and stimulating the economy.

“If this scenario plays out and the fiscal imbalance is corrected, then current levels of sovereign debt have played a critical role in righting the economy,” he says.