In the run-up to the Japanese elections later this month, Prime Minister Fumio Kishida has promised to discontinue “Abenomics”. According to him, the economic programme has not led to broader growth. Lodewijk van der Kroft, managing director at Comgest, said investors need not worry about such statements. “This is election rhetoric for the stage, Abenomics will not be thrown out with the rubbish.”
The economic reform policy - named after former Prime Minister Shinzo Abe who led the country from 2012 to 2020 - is based on three pillars: monetary easing by the Bank of Japan, fiscal stimulus through government spending, and structural reforms. This form of neoliberalism has not led to broad-based economic growth, according to Fumio Kishida, the current prime minister of the Asian country. “The key to a new form of capitalism is to raise incomes as broadly as possible,” said Kishida.
The Prime Minister has said that he wants to steer the country away from Abenomics, but according to van der Kroft, this is a hollow phrase. “Japan remains an attractive country to invest in,” he said. “The statement that there is great inequality in Japan is demonstrably not true. The country has the third highest score in the world on the Gini index, a statistical measure of income inequality. Japan is among the most egalitarian societies in the world. The ruling party (LDP) simply wants to take the wind out of the sails of its main opponent, the Democratic Party, ahead of the elections later this month.”
Earlier this year, Kishida announced his intention to increase the capital gains tax rate, which is now 20 per cent. “Immediately after that statement, the stock market plummeted and he reversed it. Abenomics will not be thrown out with the rubbish either, the reform agenda will not change quickly. It is not the case that one person determines what happens in Japan.”
A bottom-up approach
Sanae Takaichi, the policy chief of the LPD and Kishida’s main opponent, will take up an important position in his cabinet if he is elected. She has conceived the idea of higher taxes on cash deposits, which is attractive to investors.
Van der Kroft said that he sees this as a welcome political development. According to him, the realisation of profit in Japan has always been over-taxed. The current corporate tax rate is around 30 percent but used to be as high as 50 percent.
Japanese companies have enormous liquidity surpluses. 50 percent of the companies in Nikkei index have a net cash position. Companies have always had more money in the bank than they have debts. “As a shareholder, we obviously like this development, because this surplus money has to be put to work or returned to the shareholders.” In any case, according to Van der Kroft, a Japan investor would be smart to approach this market from the bottom up. “Macro-economic factors have little influence at all on stock selection in our concentrated portfolios, which typically contain 30 to 40 individual titles.”
Three promising developments
Van der Kroft continued: “Three fundamental opportunities arise in Japan: demographics are changing rapidly, it is a convenient springboard to invest in China and Japan is ‘under-researched’. Japan has an aging population, especially in rural areas. Also, a large part of the labour potential has remained unused for decades: women. That situation is also changing rapidly.”
“There are very interesting companies that respond to these demographic developments. For example, we invest in Nihon M&A, a listed corporate finance boutique with a dense network of accountants. Small family businesses in rural Japan that are facing the outflow of young people are being integrated into a larger entity. This helps to steer the succession issues for these companies in the right direction and ensures their future.”
“Japan is also ahead of the game in terms of efficiency and robotisation, which is the second solution to the lack of labour. A company like Oriental Land Company, the listed operator of Disneyland Tokyo, is another example of a company that is responding to these changes. More time off for the Japanese means more income for them.”
Van der Kroft also said that he sees Japan as a pleasant springboard to China. ”Although we also invest directly in China, we can also play Chinese developments through Japan. We do that for example through a cosmetics brand like Kosei, which is very popular in China, but also baby bottle producer Pigeon is market leader there. Mind you, these are products that are not in scope for the Chinese government to introduce new regulations.”
There are also very few parties that follow Japan, said van der Kroft. “A much-heard statement among investors was that you only went to Japan to lose money. Now the Japanese stock market is once again one of the few stock markets not standing at an all-time high. Whereas American companies are followed by an average of 40 analysts, Japanese companies are followed by only seven. We believe that investors can add alpha in that region with an active policy; we do not invest in the ‘BV Japan’ because the economic prospects there are so fantastic.”