Why Japan is a bright spot in a gloomy global outlook

With the global economic outlook darkening, Japan is an outlier - showing a degree of resilience as Covid-19 restrictions ease and the economy finally reopens.

Unlike many other countries, the economic policies of the Japanese government and central bank are a positive mix of fiscal expansion and monetary easing. In fact, according to global forecasts by the IMF, Japan’s economy will be one of the few to see growth accelerate this and maintain nearly the same pace next year.

Inflation has been accelerating globally, with the US and much of Europe having to grapple with headline inflation of over 8%. By contrast, inflation remains very low in Japan. The Bank of Japan's most recent estimate for the current fiscal year puts consumer price inflation at 2.3%.

Pent-up demand

After keeping its borders closed to most travellers throughout the pandemic, Japan has slowly begun reopening. While new Covid-19 cases have been on the rise, the number of seriously ill patients remains low, and people continue to venture out to their favourite shops and restaurants.

Pent-up demand among both consumers and businesses from the pandemic reopening will continue to underpin growth. We believe companies such as Tokyo Disneyland operator Oriental Land and confectionary company Kotobuki Spirits are ideally placed to capture this wellspring of demand.

With China as a close neighbour and a key trading partner, there are many Japanese companies with a strong on the ground presence that will benefit as the country gradually eases restrictions. One such example is Descente, a Japanese athleticwear brand and retailer that is generating strong growth as its joint venture in China expands. The Beijing 2022 Winter Olympics helped to raise people’s interest in skiing and snowboarding, where the company has a strong brand image. Another is Yonex, a sporting goods company with brand strength in badminton and tennis, and the official sponsor of the Chinese national badminton team.

Rise in entrepreneurial activity

While we continue to find a lot of ideas among small and mid-cap companies, we are also seeing attractive opportunities in the unlisted sector. Prime minister Fumio Kishida recently put Japan’s start-up market at the heart of his “new capitalism” agenda, setting a five-year goal to boost the number of Japanese start-ups tenfold.

From a bottom-up perspective (which focuses on individual company fundamentals rather than the overall macro environment) we continue to see significant entrepreneurial activity in Japan, more so compared with five to ten years ago. While new listings (both in Japan and globally) are coming under pressure amid heightened geopolitical and inflationary risks, new growth companies are still coming through, which will create future opportunities in the pre-initial public offering (IPO) market. Being on the ground in Japan, and seeing many different companies, means that we are well placed to help entrepreneurs in the latter stages of their pre-IPO journey.

Innovative companies

While Japan has always been successful in automobiles and electronics, the information revolution is throwing up new opportunities in areas such as software as a service (SaaS) and other internet-related businesses. Indeed, the growth of digitalisation is driving demand for IT software solutions across the domestic market.

We are also seeing new business opportunities emerge in response to major challenges facing the world, primarily climate change and decarbonisation. For example, one of our pre-IPO companies, fintech innovator Moneytree, recently announced a tie-up with Cogo of New Zealand to provide carbon emissions analysis for Japanese financial institutions. As Japan aims to reduce greenhouse gas emissions to net zero by 2050, there is accelerating demand for such carbon footprint management solutions.

We believe Japan continues to offer a wealth of under-researched mid/small-cap growth companies. Active managers such as myself, based here on the ground, have the opportunity not only to invest in established global leaders, but also to unearth less well-known companies (including pre-IPO), where lower levels of analyst coverage can often create some great mispriced opportunities.

In an uncertain environment, our in-depth research and on-the-ground knowledge is invaluable when looking at the micro level and speaking to company management to fully understand the prevailing dynamics.

Important information

Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Fidelity Japan Trust PLC invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. Changes in currency exchange rates may affect the value of investments in overseas markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. This investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.

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