As a macroeconomic growth story, Japan has appeared fairly unattractive. However, just because the economy may be weak, it does not mean an absence of investment opportunities. What has changed is where these opportunities are. Today the growth stories involve domestic Japan (rather than the global leaders of the past), and even more so in those companies that are benefiting from growth within Asian economies and further afield.
The integration of the Japanese economy with the rest of Asia is somewhat underreported, yet is of great importance. It is a story that has evolved over the past 20 years, so much so that many Japanese companies are successfully growing their market share both in the Business-to-Consumer (B2C) and Business-to-Business (B2B) landscapes across Asia. In the consumer space, Japan offers well-established and well-managed consumer brands, which are lacking in the rest of Asia. Japanese brands are typically associated with quality while its product positioning is often in the affordable segment (in contrast to European/U.S. brands that dominate the luxury segment). A decade ago, Japanese products were simply too expensive for Asia's middle class, but as incomes have grown, consumers have sought to trade up for better quality, thereby creating a market for Japanese brands that did not previously exist. Furthermore, discretionary spending in China is expected to grow considerably by 2020 and Japanese consumer brands are well-positioned to tap this growth.
As Asian economies develop, so do their populations' demands for health care. For Japanese health care companies, there are opportunities to tap growth in nascent markets where there is a need to develop health care infrastructure and temper the cost of overall health care provision. Meanwhile, Japanese health care firms are building up expertise and capabilities that will increasingly be in demand elsewhere globally as China and the West all face aging populations and the rise of lifestyle diseases.
Another way in which Japanese companies are increasing profitability within Asia involves the other side of the rising income story. While real rising incomes are great for consumers, they place greater pressure on companies having to pay these higher wages. As a result, businesses have been forced to adopt more technology into their processes to drive productivity and protect profit margins. Robotics and other modes of automation are increasingly being utilized to counter the impact of more expensive and scarce labor. Indeed, the adoption of automation and robotics is set to soar in China and other Asian countries to both boost efficiency and improve quality. This is very favorable for related businesses over the next decade because automation and robotic penetration in China and the rest of Asia is still extremely low compared with countries like Japan, Germany and South Korea.
Meanwhile, more important than the fact that wages are rising, China and other Asian countries need to improve the quality of their output and climb the value chain. While China has been well-known as the world's manufacturer of low-end products like children's toys, it has also risen up to produce smartphones, LED screens and other technology. This shift from a relatively simple to a much more complex product requires higher quality along the entire supply chain. We believe automation is imperative for these companies as it can help increase in the quality of products and to deliver that quality consistently. In terms of robotics, Japan has some of the leading companies in the world, in addition to several key component suppliers, which can be beneficiaries of increasing demand in the next decade.
Japan will always be dominated by discussions about macroeconomic, political and regulatory headwinds. These are things outside of our control. What we can control is our analysis of a company and avoiding areas of the market that tend to be sensitive to cyclical ebbs and flows. Yet there remain some very strong Japanese companies that represent the real growth story in Japan today: Companies that can capture domestic demand, tap into Asia's ongoing evolution and take global market share. We believe Japan is home to many.
To learn more about how we capture all-cap growth opportunities in Japan visit global.matthewsasia.com/japanfund
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