Japan’s recovery still underestimated by investors


Updates on Japanese business and finance

The author is Head of Investments for Japan at Fidelity International

In Japan, the stable and steady expansion since the launch of Abenomics nine years ago has been a radical departure from the 20 years of economic stagnation that preceded it.

The economy created 5 million jobs, businesses boosted capital spending as profits rose, and overall the country returned to growth. The Nikkei 225 has tripled in value over the past decade.

It is a real story of reversal. Yet Japanese stocks are an asset class that remains underestimated and under-owned by international investors.

With a vote next week to select the next leader of the ruling Liberal Democratic Party and the new Japanese prime minister, the new leader’s priority is to ensure the country continues the turnaround.

Perhaps the biggest risk for the PLD in national elections later this year is that of a potential backlash from voters tired and frustrated by what they see as a slow response to the pandemic on the part of the administration. outgoing.

Indeed, Japan still faces short-term disruption due to Covid-19. Over the longer term, to keep the economy on a consistent growth path, there are three key areas where progress is essential.

Monetary policy has been the initial cornerstone of economic support for the past decade, but fiscal support must make the biggest effort for the next stage of growth.

Japan Inc sits on one of the biggest piles of corporate cash. As the nightmares of deflation fade and structural wage increases seem likely, the conditions are ripe for a change in the way management thinks about spending.

Increasingly, investing for the long term seems to be the wisest option. But to encourage this transition and unlock the growth that a new wave of corporate capital spending can trigger, the next administration must build on the supportive tax measures of recent years.

This requires stronger tax incentives to promote growth in targeted areas, including digital innovation, and improved corporate environmental, social and governance performance.

A second area of ​​government intervention should be the acceleration of the green transition. Outgoing Prime Minister Yoshihide Suga started the countdown in October last year when he used his first political speech to make a surprise pledge that Japan would aim for net zero greenhouse gas emissions by 2050.

But it will be up to the next prime minister to make sure the country is on the right track. As the world’s third-largest economy, Japan plays a leading role in the fight against global warming, but without greater buy-in from businesses and investors, it will fail.

Investors need to engage more and more with companies, using shareholder votes to ensure management is meeting their commitments in decarbonization and related areas. Businesses already seem receptive.

A third priority area for the government should be to reduce the gender gap. Besides the societal benefits, it would also bring huge broader economic benefits. Shinzo Abe’s administration put the gender gap on the agenda from the start, but progress has been piecemeal. Japan still lags behind, with a gender pay gap that ranks second among the worst countries in the OECD.

Simply put, Japan’s traditional “male dominance, job for life” mindset is anachronistic. In May, we sent letters to hundreds of companies in Japan setting out our expectations. This includes 30 percent female representation on boards and management by 2030, 30 percent female representation among all employees by the same year, and disclosure of the gender pay gap. (which is not currently mandatory or common practice in Japan).

In my conversations with foreign investors, I am often surprised at how much they have missed out on many of the positive changes of recent years. Of course, international investors pay more attention to Japanese markets when the yen is relatively weak, but this is a tactical approach that fails to recognize what is fundamentally an “underweight” exposure inherited from the country.

Regardless of the next leader, it is the corporate sector, not the policy makers, that is key to Japan’s economic development. The next administration must ensure that companies feel confident and motivated to deploy capital expenditure and foster innovation; it must mandate the representation of women and gender equality at the highest levels of management; and ensure a greener and more sustainable economy. It is the Japan of the future.


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