Japan, once a global leader in technology and innovation during the 1980s and 1990s, has faced relative stagnation in recent decades. Nevertheless, the country still offers untapped potential for growth investors, according to Donald Farquharson, a Japan specialist at Baillie Gifford.
With a unique blend of traditional industries and emerging technological capabilities, Japan presents a complex yet compelling landscape for investors. While challenges such as demographic shifts and currency risks persist, opportunities in areas like digitalisation, automation, and global market integration remain promising.
“Japan is often underestimated,” Farquharson told Investment Officer. “While it may not experience the rapid economic growth seen in other markets, certain sectors have strong structural growth potential.”
Baillie Gifford, an Edinburgh-based asset manager with 224 billion pounds(266 billion euro, as of 30 June) in assets under management, prides itself on being the largest specialist overseas investor in Japan.
Recent market turmoil, including a 12 percent plunge in the Nikkei on 5 August followed by a rebound, has not altered Farquharson’s outlook. “These big one-day moves don’t mean much in the long run. What’s more important is identifying companies that can grow earnings over time and seize opportunities,” he said when asked about the market turbulence.
Extended investment horizon
Following the pandemic, Japan experienced economic recovery and extreme currency weakness, benefiting cyclical and export stocks like banks and car manufacturers. However, Farquharson noted that these were “perhaps not the best quality companies.”
“If we are heading into a period of more challenging market conditions, fundamentally strong companies will prevail,” he said. “We focus on durable and often overlooked companies in digitalisation, automation, skincare, and healthcare—sectors poised to benefit from long-term structural trends. With an extended investment horizon, it becomes clearer which companies will thrive.”
Baillie Gifford’s approach to investing in Japan mirrors their global strategy: identifying companies with potential for sustainable long-term earnings growth. While Japan may not have tech giants like Nvidia or Amazon, it is home to companies offering unique and innovative solutions both domestically and globally.
Baillie Gifford’s positive equity outlook on Japan is shared by other experts who highlight the country’s benefits from corporate governance reforms and improved economic growth. “We see value in Japanese stocks due to a combination of cyclical and structural factors,” said Marco Willner, managing director of multi-asset solutions at Goldman Sachs Asset Management, in an earlier Investment Officer interview. Janus Henderson recently said it remains firmly convinced that Japan’s ongoing corporate governance reforms, coupled with the country’s unique economic dynamics, position Japanese equities for strong and sustained growth opportunities.
Recruit, M3, Rakuten
Digitalisation is a key theme in Japan’s growth story, Farquharson said. Despite a slow start in this area, several Japanese companies have emerged as global competitors. For example, Recruit Holdings owns Indeed, a job search platform that has revolutionised the job market by focusing on the evolving needs of job seekers. Similarly, M3 has digitised drug marketing, becoming a dominant platform outside North America.
Farquharson also highlighted Rakuten, which competes directly with Amazon in Japan. Rakuten’s enterprise value relative to its sales is notably low, suggesting potential undervaluation by the market. This, he argued, could present a lucrative opportunity for investors who understand the company’s long-term strategy.
“Invariably, the successful companies are domestic,” Farquharson said. “This is due to the complexity of regulations and customer interactions, which has historically made it difficult for large foreign players to enter the market.”
CyberAgent, Fanuc, Keyence
Japan’s market also offers unique opportunities due to lower online penetration in various sectors. Companies like CyberAgent have capitalised on this by establishing strong positions in on-demand media, adapting content for mobile consumption in ways that resonate with Japanese consumers.
Additionally, Japan’s demographic challenges, particularly its ageing population, have spurred innovation in automation and robotics. Farquharson pointed to firms like Fanuc and Yaskawa, global leaders in robotics, while Keyence dominates the machine vision market. These technological advancements not only address domestic issues but also position Japan as a crucial exporter of cutting-edge solutions.
Farquharson downplayed the potential threat of outsourcing to other parts of Asia. “The cost of an IT engineer in Japan is now comparable to that of an IT engineer in China. China’s wages have increased significantly, while Japan’s have remained stable. Therefore, outsourcing more work to Vietnam or China is unlikely. Instead, Japan faces a pressing need to improve efficiency.”
Generational shift in leadership
Farquharson also noted a generational shift in Japan’s corporate management as a key driver of change. Younger, more entrepreneurial leaders are increasingly taking the helm, bringing fresh perspectives and a willingness to adapt to new market realities. This shift is beginning to align Japanese companies more closely with shareholder interests, potentially boosting investor confidence.
Japan has seen an extreme shift towards cyclical, traditional industries,” he said. “However, this focus has created a significant gap, almost overlooking the longer-term structural growth opportunities that Japan actually possesses.”
Baillie Gifford’s four dedicated Japan strategies:
