Spotlight on Japan´s economy and businesses | Banque et Caisse d'Epargne de l'Etat, Luxembourg
21st January 2019

Spotlight on Japan's economy and businesses

Marc Fohr, Head of Investments at BCEE Asset Management, takes a look at economic trends in Japan and the challenges the country is currently facing.

How has Japan developed on the global economic scene?

Japanese businesses have made significant progress over the past 20 years. Once riddled with debt and severely lacking in governance, they have proved that they can clean up their balance sheets and improve corporate governance practices. The structural reforms implemented by the government and financial authorities have provided considerable assistance, contributing to greater transparency, less political interference and more diversity in appointments of directors (with a slight increase in the numbers of women and foreigners).

Japan's economy and local businesses have historically been very dependent on foreign trade and, as a result, have been sensitive to fluctuations in the Japanese yen.

The average Japanese business is currently much better placed to compete with foreign competitors on the global market thanks to healthy finances (very often posting positive net cash positions) and stronger management teams.

As a consequence, a weaker yen makes Japanese goods more competitive abroad and places greater value on sales in foreign currencies, thereby tangibly improving businesses' revenues.

This same sensitivity to fluctuations in the yen offers built-in protection for investors in Japanese firms: even though a weaker yen leads to lower yields in euros for a yen-denominated portfolio, it boosts the financial results of businesses as well as their stock market returns.

Current issues in Japan and what Japanese firms are doing about it

From a macroeconomic perspective
From a macroeconomic perspective
From a macroeconomic perspective, Japan's changing demographics is a problem—a rapidly ageing population combined with limited immigration threatens the country’s growth potential for decades to come. Japan’s very first consensus in 1963 reported 153 centenarians while, in 2016, that figure had risen to 65.692. Even though the government has put considerable effort into addressing the issue, Japan is caught up in the same overall demographic trend that is affecting all countries, with substantial momentum and changes that are slow to take effect.

But even though the social welfare system may consider the ageing population to be a burden, for businesses, it is the answer to the falling demand in consumer goods. Businesses are even getting creative by developing and marketing a broad range of products aimed at senior citizens.

Because the phenomenon of an ageing population is not limited to Japan, businesses that specialise in new products for senior citizens also have a unique competitive advantage over their peers.
Leader in the technology and manufacturing sectors
Leader in the technology and manufacturing sectors
Despite current circumstances, income per capita is still steadily on the rise and unemployment figures are low. What is more, Japan is still number one in the manufacturing and tech sectors, which should protect it, to a certain extent, from low-cost competition. Japanese businesses are also at the forefront of the special steel, industrial automation, consumer electronics and robotics sectors.

What international initiatives are safeguarding Japan's place amongst the world's major economic powers?

Against a background in which domestic opportunity is limited, liquid funds are available and Japan's expertise in international trade is undisputed, M&A is on the rise, with a few noteworthy transactions recently taking place. These transactions include Takeda’s acquisition of Shire (for more than $60 billion), Renesas’ acquisition of IDT in the semi-conductors industry, and the numerous transactions carried out by Softbank, which has earmarked the princely sum of $100 billion to acquire foreign IT companies. Faced with an ageing Japanese population, CEOs acknowledge that, in a country whose active population is shrinking, long-term growth can only be achieved abroad.

According to analysts, these transactions should proliferate, not only to compensate for a business model that has reached the end of its utility for a population that is both ageing and in decline, but also to take on a new direction that would relieve pressure on margins against the current backdrop cast by the Bank of Japan’s negative interest rates.

Ultimately, the stormy relationship between the US and China (mainly over customs tariffs, breaches of intellectual property laws, protectionism and the blocking of mergers and acquisitions), could give Japan a boost as China finds itself in need of stronger economic and political ties with other major economic powers in order to compensate for losses in trade with the US. All signs seem to suggest that, thanks to its position at the forefront of the tech and manufacturing sectors, Japan stands to gain from these trends.

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