By Geoff Spiteri, BNY Mellon Investment Management EMEA
An emphasis on automation has the potential to address the country’s demographic challenge head-on and solve the problem of a declining labour force, says Miyuki Kashima, BNY Mellon’s head of Japanese equity investments.
Picture the scene: In a darkened factory, the non-stop whirr of machines, of robots toiling through the night to make… other robots. No lights, no rest, no breaks, no interruptions – just a relentless, ruthlessly efficient manufacturing cycle.
For Miyuki Kashima, BNY Mellon head of Japanese equity investments, this is no dystopian vision of the future. Instead, it’s an accurate portrayal of just one of the ways Japan is addressing its demographic headwinds. As Japanese society ages, she says, it will need to rely ever more on automation and new technology to bridge the productivity gap. That creates a requirement for robots to start taking on the jobs that people used to do – and if that also means robots building other robots in the dark then so be it.
Employment data and labour force projections underline the point. Kashima notes how the jobs-to-applicants ratio has soared while the unemployment rate has plummeted as the economy recovers from its long post-bubble slump. Meanwhile, even if (as is hoped) more women do enter the workforce, the number of people in work will plateau at best in the next decade. Together, the combination of a tight labour market and the structural trend of an ageing population create a real need for an automated future.
Efficiency at its best
Beyond robotics, Kashima highlights another technology-driven trend that has the power to transform the investment landscape: connectivity. Here, she says, the Internet of Things (IoT) finds its natural home in Japan. Partly this is because of a cultural proclivity for both efficiency and hi-tech solutions to problems. The most obvious example, she says, is the world-famous bullet train, which has a cumulative delay of just 0.9 minutes over the course of a year even despite running 342 departures every single day in one of the world’s most earthquake- and typhoon-prone countries.]
This kind of efficiency also finds its way into more mundane areas. Kashima notes, for example, that Japanese vending machines are rarely, if ever, broken. “There’s no culture of vandalism here and the crime rate for both petty and serious crimes is among the lowest in the world,” she says. “That’s pretty significant if you’re thinking about how the IoT might operate in real life. Given its demographics, Japan offers the perfect marriage of clear demand and a suitable environment.”
No surprise, then, that many Japanese companies are looking to capitalise on the global trend towards connectivity and automation. One example in Kashima’s BNY Mellon Japan All Cap Equity strategy is Nidec, a manufacturer of the servo motors used to power robots. Although, this segment makes up only a small part of Nidec’s current business it is expected to grow, says Kashima, as is the company’s currently much larger focus on devices used in automobile electrification. Likewise, in her Japan Small Cap Equity Focus strategy, a key holding is Sanken, a company that designs and manufactures everything from semiconductors to diodes, micro controller units to converters, all of which could find applications in the field of connectivity, particularly in the automobile sector where it already has a clear capability.
Crucially, she says, the corporate sector as a whole is now in a good place to meet demand for new technologies. After decades of underinvestment and falling productivity Japanese companies are once again posting record profits, which means they have the capital to invest. Says Kashima: “The potential is there for the Japanese corporates to overtake their global peers. We haven’t really been at the forefront of connectivity – but given how patchy the record has been on first-generation IoT that’s not necessarily a bad thing. It could now actually work to our advantage.”
Technology aside, Kashima points to another surprising area that she believes could deliver future returns for Japanese investors: pet insurance. While Japan may not be known as the global mecca of pet ownership (just 37% of households own a pet – well below the global average of 56%2) it is an area where the average spend is rising. This may be down to Japan’s chronically low birth rate, says Kashima: people are lavishing their affections (and their disposable incomes) on pets instead of children.
More significant, though, is the low penetration of pet insurance in the Japanese market. According to market research firm Fuji Keizai there were some 1.23 million pet insurance contracts effective in Japan as at the end of 2016. That’s against an estimated population of 20 million cats and dogs. The Nomura Research Institute estimates the current size of the Japanese pet insurance market at several tens of billions of yen.3 Contrast that with the UK which today has an equivalent market in the region of JPY 146 billion.4 “Clearly,” says Kashima, “the scope for growth in this underappreciated segment is phenomenal.”
For the Japan Small Cap Equity Focus strategy, Kashima’s conviction finds expression in a holding in pet insurer Anicom, one of the portfolio’s top exposures. Founded in 2000, the company now has a 60% market share, making it well placed, says Kashima, to benefit from future growth.
She concludes: “For too long investors have fixated on the demographic headwinds facing Japanese society without fully recognising how an ageing population can also create real opportunities. In the coming decades other major global economies will face their own demographic time-bombs and so will need to make the same difficult choices Japan is making now.”
This creates some interesting possibilities. “Japan has potential to surprise us all by leapfrogging other nations in the uptake of new technologies. In my view, all the conditions are just right: a labour shortage, demographic headwinds, record company profits. All this in a country where everything can work efficiently once in place – so implementation could be much easier than in our peers.”
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1 Source: Central Japan Railway Company. Data refers to JR Tokai bullet trains.
2 GFK, 24 May 2018
3 The Asahi Shimbun: ‘Health insurance for pets now essential as vet fees skyrocket’, 29 May 2017
4 Financial Times: ‘UK insurers scent rich rewards from pet owners’, 10 June 2017. Currency conversion as of 1 May 2018.
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