The fund manager of our japanese equity fund Taiko Japan, Rupert Kimber, recently came back from a trip to Japan. Here are his notes.
Japan has truly come alive
Japanese companies will continue to improve their global competitive position which suggests further earnings growth and margin/cashflow improvements that will continue to feed shareholder returns.
Industry automation and consolidation
The labour shortage is not only leading to further automation but also accelerating industry consolidation as the weaker companies are increasingly struggling.
Many more companies are now openly agreeing with our thesis on industry consolidation. The recent press comments on wage hikes are noteworthy not only due to the scale, over 10% in some cases, but the fact that historical convention (companies in the same industry largely granted similar hikes) has been shattered by Nippon Steel that has raised wages higher than competitors. Furthermore, some large companies offered a wage settlement higher than the union requests.
The competitive hiring market is seen at the graduate level where starting salaries are rising over 15% following a similar rise last year and even that has left some companies short of freshmen hires.
The big conundrum relates to the public sector, a large employer, and we have yet to see the planned wage hikes for the new year starting in April.
Small companies are simply unable to afford the wage hikes seen at larger companies and there is a suggestion that large corporates must pay higher contract prices to the small companies to allow them to raise wages sufficiently to retain staff and invest in technology to improve productivity.
Both companies and the government intend to accelerate plans to raise the number of foreign workers. On my visit to the scallop industry, the processing plants were completely staffed by Indonesian and Vietnamese women.
A KEY CONCLUSION here is that larger companies will aggressively pursue productivity improvements and could therefore close the gap with US and European companies, utilising higher investment levels in technology.
Strong domestic economic activity
Domestic economic activity is buoyant given the heavy capex related to new plant construction in industries such as semiconductors. This is a multi-year story as these new plants require enlarged supply chains so there is a multiplier effect.
The exit from China continues with large auto companies looking to downsize their current footprint by c30%. Some chief executives I saw were at pains to point out that they had zero China exposure, and they seem very relieved.
Tourism is very strong with February number +8% compared to February 2019 to the point that in parts of Kyoto, foreigners will be banned from April. The weak yen makes Japan absurdly cheap and London ludicrously expensive in comparison, not to mention Geneva and New York!
There is still a clear divide between Tokyo and non-Tokyo in terms of domestic consumption and having travelled to some remote towns to see companies, the buoyant Tokyo consumption levels seem a different world away from small towns in the north of Hokkaido.
Land prices are rising sharply in some areas which is fuelling high-end consumption especially as the weak yen is discouraging foreign travel.
Interest rates / Yen
The BOJ have made minor steps to remove the YCC, but this is as yet not a full blown retreat from zero interest rates.
As we discussed a few weeks ago, the yen has resumed the weakness post announcement and I still think JPY 155-160 vs the USD is possible without significant easing by the Fed, and I don’t see that taking place.
Even at JPY 150, Japanese manufacturers will be stunningly profitable especially as underlying imported input costs are falling, hence a slightly weaker yen and imported cost pressure can be accommodated without pressuring margins.
This bodes badly for European competitors.
The US remains highly protectionist and Biden appears to have killed the proposed acquisition of US Steel by Nippon Steel.
It will be interesting to see how that effects the large overseas M&A planned by Japanese corporates. Asian billionaires are in Tokyo looking at business opportunities again partly influenced by the attractions of the weak yen.
A few points on stock market
Foreign interest, especially from Asia, remains very high.
Domestic retail investors are reengaging rapidly as they seek higher returns as opposed to non-yielding cash to offset inflation.
Corporates are reducing cross shareholdings but there are buyers.
The Tokyo Stock Exchange continues to ramp up the pressure on corporate governance and the activists continue to stalk badly managed companies.
Significant further MBOs and mergers are likely.