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AA-rated Japan equity chief: three themes to follow in 2018

Columbia Threadneedle’s Daisuke Nomoto says reforms, research and productivity will come to the fore.

Raising the roof in Japan

2017 has been a relatively quiet year for Japan and investors positioned in the country. The biggest event for the country was the 48th general election of members of the House of Representatives. Prime Minister Shinzo Abe’s coalition of the Liberal Democratic Party and Komeito retained their seats in what was perceived by many as weak opposition.

With a relatively unmoved backdrop, Columbia Threadneedle’s head of Japanese Equities, Daisuke Nomoto, and his team further raised Japanese stocks allocations due to near-term catalysts, such as increased strength in bottom-up corporate earnings, and receding political risks.

Looking ahead, Citywire AA-rated Nomoto, who manages the Threadneedle Japan Retail fund, has highlighted three key trends which the team has identified as being positive contributors for 2018 and the coming years.

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Corporate governance reforms

Nomoto said topics of discussion with Japanese corporate management have shifted materially over the last decade towards long-term corporate strategy, principal-agency relationships.

‘This positive development has derived from the introduction of corporate governance reform two years ago and has gradually helped increase the return on equity (ROE) for Japanese companies. We believe that better corporate governance will continue to help unleash the value that has been hidden within Japanese equities.

‘Two of the major objectives of the corporate governance incentives are to eliminate conflicts of interest that exist between management and shareholders and to ensure that a company’s assets are used effectively in the best interests of stakeholders.

With a positive correlation between the level of improved corporate governance and ROE in Japanese companies, Nomoto said Figure 1 shows how the average ROE of Japanese companies was substantially lower than in the US and Europe in 2011, but the gap had narrowed noticeably by 2017.

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Improving productivity: labour market reform

Nomoto said productivity is a far more critical concept for the Japanese economy and its corporate sector than simply high growth.

‘Abe drove labour reforms forward with a goal of encouraging women and retired workers to return to work, increasing the rate of labour force participation.

‘The government’s various efforts are starting to bear fruit: some 1.5 million Japanese women have been added to the workforce over the last four years and the female labour participation rate (Figure 2) has risen to 68% – up eight percentage points in the last 15 years, having caught up with the US, according to OECD data. Also, the total number of employed has increased by more than 2.4 million over the last four years.’

Nomoto said deregulation of Japan’s labour structure is underway with the goal of increasing salaries and providing better career opportunities for non-fulltime workers.

As part of Abe’s structural reforms, the government introduced the concept of ‘equal pay for equal work’, called ‘Hatarakikata-Kaikaku’ with the aim of improving labour productivity.

‘According to McKinsey’s report, entitled The Future of Japan: Reigniting Productivity and Growth, if Japan succeeds in doubling its rate of productivity, it could boost GDP growth to about 3% and increase GDP by up to 30% by 2025. Note that the Japanese government’s goal is to increase GDP to ¥600 trillion (currently ¥546 trillion), or to $5.5 trillion, by 2020.’

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Competitive edge

It can be said that Japan’s elevated economic complexity over decades has been supported by high levels of patents and R&D.

However, Nomoto said, through its continued investments in future technologies, Japan should be able to maintain its leading technological edge across such industries as robotics, automation, games, specialty materials, and precision equipment. 

‘We are witnessing many technologies and inventions emerging in Japan, supported by its research-oriented corporate culture. There are multiple ways for Japanese companies to enhance their competitive advantage and increase operating productivity.

‘McKinsey’s Future of Japan... report claims that simply by adopting global best practices, deploying next-generation technologies, and organising for discipline and performance, Japanese companies can achieve at least 50% of their productivity goal by applying practices that are already in use elsewhere around the world.’

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Daisuke Nomoto
Daisuke Nomoto
215/221 in Equity - Japan (Performance over 1 month) Average Total Return: 0.02%
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