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3 Reasons to Invest in Japan

The Nikkei may have rallied 50% over the past two years, but the ongoing positive impact of Abenomics mean it is not too late to benefit from investment growth in Japan

Emma Wall 9 April, 2015 | 7:45AM

Retail

Would you travel more than 1,000 miles just to buy a packet of nappies? Thanks to a favourable exchange rate, a growing disposable income and a certain designer cache to the Kao brand, the new Chinese middle class is doing just that.

Such is demand for these disposable diapers that retailers in Tokyo are restricting shoppers to just two packets of Merries per trip. It is not just nappies that tourists cross the East China Sea to snap up. Certain Japanese goods are synonymous with the best possible quality and as well as designer nappies – which Chinese mothers send their babies to nursery in, keeping domestic brands for wearing at home – tourists are buying multiple knives, toilet seats and thermoses.

“Tourism in February was up 58% on the year before, boosted by the Chinese holiday season,” said Simon Somerville manager of the Silver Rated Jupiter Japan Income fund.

“It is not just the weak yen that is attracting Chinese tourists, it is the ongoing story of the growing Asian middle class. They have money for the first time and want to see more of the world. Japan is the perfect destination for your first holiday as their culture is so accommodating to visitors – there is very little crime and they would never dream of ripping you off, locals and visitors pay the same price.”

Japanese retailer Don Quijote (7532) which sells everything from second hand luxury leather goods, fancy dress outfits, green tea KitKats, musical instruments – as well as the nappies, knives, toilet seats and thermoses favoured by the Chinese garners 10% of sales from tourists – more for those based in particular tourists districts. These eclectic retailers may baffle Western shoppers – including this journalist – with their excessive approach, but business is booming, due in part to the fact that store managers are allowed to customise their offering, dictating the look of the stores and the stock to appeal to the target consumer.

Chinese tourists are restricted to buying two packs of designer nappies in Japan

And it is not just tourists spending more. From this month the six largest employers in Japan have vowed to increase wages and according to analyst firm CLSA the 2015 Shuntō – translated as ‘spring wage struggle’ – reveal a 3.82% increase for 30-year-olds and an average increase of 2.6% for 35 year old workers.

“Those on the poorer end of the employment spectrum could see wages increase by up to 20%,” predicted Neptune Japan Opportunities fund manager Chris Taylor.

“Companies are paying staff higher salaries and bonuses and swapping temporary workers onto permanent contracts. At least 35% of Toyota’s employees have been temporary workers, now they will be paying for their health insurance and pensions.”

Increased wages mean more yen in the pocket of the Japanese consumer, and thanks to changing employment trends such as longer working hours and back-to-work mothers big superstores are out of luck and convenience stores are in favour. Convenience stores such as 7-11, owned by the Japanese retail conglomerate Seven & i Holdings (3382).

Healthcare

Just like other developed markets, Japanese people are choosing to become parents later, if at all, and having fewer children. While the birth rate may be not that dissimilar to that of the UK, Japan’s problem lies in its objections to immigration. A regular flow of migrants props up European and North American populations while Japan remains resolutely anti-immigration.

While this stance creates certain economic imbalances – and threatens to overburden the state – certain businesses are rubbing their hands together with glee.

Twenty five per cent of the Japanese population is aged over 65; equal to 32 million pensioners. And there are the same number of over 70 year olds as the entire population of Australia. This ratio is only going to get worse as fewer people are born and life expectancy improves.

William Hall, President of research company Ipsos Healthcare Japan says that Japanese Prime Minister Shinzo Abe has recognised this problem – and opportunity it presents to the healthcare sector.

He cites the 2013 government pledge of investment in regenerative medicines and the move to eradicate the so-called ‘drug lag’, meaning pharmaceuticals now get approved at the same rate as the US Food and Drug Administration.

Hall’s Forum for Innovative Regenerative Medicine (FIRM) boasts more than 65 members from across industries looking to benefit from the commercialisation of regenerative medicine including Panasonic (6752), Fujifilm (4901), Mitsubishi Chemical Holdings, Novartis Pharma and Ernst & Young.

Property

Land prices in Japan fell by two thirds during the recession, but they are now rising rapidly. First time buyers won’t be priced out of the property market like in the UK however – Government initiatives mean that you can get a 35 year mortgage at 1.5%, and it is subsidised for the first decade dropping down to just 0.6%. Add to that you don’t need a deposit for new builds and it’s certainly buyer-friendly.

This is a great boon to residential property companies such as PanaHome, although before UK house buyers feel too hard done by, it is worth remembering that in Tokyo the average first-time buyers flat is just 25 metres squared, or 270 square feet.

Space is indeed an issue when it comes to city living, especially in Tokyo. If homebuyers want space, suburbia beckons – superfast bullet trains can bring you f outside of the city hundreds of miles in less than an hour. But for growing companies who want to stay in the business district there only one option – and that is to build up. Mitsubishi Estate (8802) owns a considerable chunk of properties in the Tokyo version of the City of London or Canary Wharf called Marunouchi.

Land which used to make up part of the Imperial gardens was bought from the Emperor 150 years ago and now boasts 200-odd skyscrapers, 13 railway lines, seven subway stations, an underground pedestrian system and a free shuttle bus.

The company is ten years into a vast redevelopment plan which sees floorspace go up 1.5 times each time a plot is rebuilt and unit prices, and revenues, go up with it. Once they complete the final building it will be time to start all over again, leveraging each project with land prices and already secured rental income. The company is owned by Taylor in his Japan fund and by Neptune founder Robin Geffen in the Bronze Rated Neptune Global Alpha fund.

Increasing land values does not only benefit homeowners and property companies. The corporate lending culture in Japan relies on leveraging a real asset – so as land prices rise so companies can re-leverage and invest in their own development.

“There is not a single area in Japan where land prices are falling,” says Taylor. “This will help boost consumer confidence which is essential to the sustained recovery of Japan. Those aged under 45 don’t remember the good-old-days, they only know a deflationary environment.

“Rising land prices and a weak yen will give companies the cash to pay better wages and give Japanese workers the confidence that Abenomics is working.”

Marunouchi business district in Tokyo

 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
FUJIFILM Holdings Corp4,836.00 JPY0.77
Jupiter Japan Income Acc126.36 GBP-0.42
Mitsubishi Estate Co Ltd2,113.50 JPY1.32
Neptune Global Alpha A Acc GBP5.41 GBP-0.53
Neptune Japan Opportunities A Acc GBP4.14 GBP-0.22
Pan Pacific International Holdings Corp1,768.00 JPY0.86
Panasonic Corp894.70 JPY0.24
Seven & i Holdings Co Ltd4,142.00 JPY-0.86

About Author

Emma Wall  is former Senior International Editor for Morningstar

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