Investor’s Bookshelf: The veteran Japan watcher bullish on the economy's revival
Japanese stocks have soared since early 2022, with the Nikkei 225 index reaching new highs recently, a clear indication that Japan’s economy – once perceived as stagnant after peaking in the early 1990s – is seeing a transformation that captures investors' attention.
Despite doomsday dogma concerning Japan’s aging and declining population, Jesper Koll, a resident and veteran of the country’s investment industry since 1986 and author of Japan’s Economy – The Envy of the World, sees it very differently.
Koll wears many hats. He was the founding chief executive officer of WisdomTree Japan and now serves as senior adviser to WisdomTree Asset Management, a global ETF manager.
He is also a global ambassador at Japanese public company Monex Group and one of the few non-Japanese members of the Keizai Doyukai, the Japan Association of Corporate Executives.
“I use the catchphrase that I want to be reborn as a 23-year-old Japanese person. Japan will be the only G7 country where a new middle class will emerge because of the changing demographics,” Koll told AsianInvestor.
While Japan’s population is declining at a rate of 2,200 daily, the development has become a wake-up call for the country to rethink and reboot its economic and business landscape.
“The demographic clock has been ticking for many years, but now the alarm is also ringing. And this burning platform is now fuelling change that will benefit the younger people who are in short supply,” Koll said.
SOLID FUNDAMENTALS
One dominant notion is that Japan’s economy has been predominantly stagnant since the early 1990s. While some aspects have been true, Koll goes against letting that narrative guide investors.
"Investors should look for corporate metabolism; the speed at which organisations can make decisions, adapt, and evolve. They should not look at past earnings, but where the company is going to be three years from now,” he said.
Corporate Japan’s operational gearing has reached a much lower break-even point – the point of top-line growth where a company starts making money. That point used to be at 2% sales growth but is now close to 0.1%.
“Based on the solid fundamentals of improved operational efficiency, investors started to see the appeal of making a small bet on pickup in sales, and the cycle turned. And in many cases, the currently weak yen has been adding to sales overseas,” Koll said.
CHANGE CONTINUES
The strong momentum for corporate Japan also relates to Koll’s book, as economic activity spurs job opportunities for the sought-after young Japanese.
However, they are showing changing preferences, reflecting the shift in Japanese working culture and the established pecking order in businesses. For instance, an unprecedented trend over the last five years shows professionals leaving prestigious, safe jobs in the Ministry of Finance and Ministry of Economy.
“Three out of four of these people in their 20s and 30s do not join big firms like Mitsubishi Corporation or JP Morgan, they join startups. The demographics are a catalyst for risk-taking by the younger generation, while most young generations around the world are aspiring for safe jobs,” said Koll, who had worked as chief strategist and head of research for JP Morgan and Merrill Lynch over the past two decades
The changing demographics are also catalysing industrial change. Japan has 3.6 million incorporated enterprises, and of these, 2.6 million have a majority shareholder and president over 70 years old.
“Japan got rich before it got old, and many companies have so-called lazy balance sheets with high amounts of cash and high retained earnings. It is in the national interest to improve the return on assets, the return on equity, by embracing the reality that those balance sheets should be sweated harder,” Koll said.
About 1.6 million of those 2.6 million lack succession, presenting investors an opportunity to swoop up solid, well-financed businesses primed for growth.
“We are now in the middle of an unprecedented mergers and acquisition boom in Japan’s private market, and small- and medium-sized companies across industries are now being restructured in a very positive way with new owners and investors facilitating this development,” Koll said.
POTENTIAL PITFALLS
Koll flags certain pitfalls for the current upswing. One external risk is renminbi devaluation.
China is competitive in many industries, and a renminbi devaluation would change the competitive landscape and create a "huge headwind" for Japanese companies, he said.
The biggest internal threat is premature tax hikes. One reason for the yen’s extraordinary weakness in this cycle is the fiscal deficit’s continued runaway path, he explained.
“Future governments could be tempted or pressured into increasing taxes to reign in the fiscal deficit to profit from the increasing economic activity. That would lead to a recession very quickly,” he said.
Cutting people’s purchasing power through tax increases would be bad news, as most Japanese companies need solid domestic consumption. Koll hopes this will not happen and that the current growth focus will continue.
“In the past 20 years, whenever there was a hint of a recovery, taxes would go up, or the Bank of Japan would tighten policy. Now you have 100% pro-growth commitment. For example, you see a policy of embracing startups and venture capital as a growth model,” Koll said.
The speed of decision-making also needs to improve in Japan, as companies get new investors and owners that will inevitably bring change and new ideas.
“I am optimistic, but there is a need to increase the pace of embracing restructuring or make a spinout, and focus on the core business,” Koll said.
NEW BOOK
For societal issues arising from Japan's shrinking population beyond the business realm, Koll sees a trend sparking the idea for his next book in the works: Japan’s increasing immigration.
The last 18 months have seen an average of 1,200 non-Japanese receive work permits or permanent residency.
“My next book will look at Japan as a melting pot, especially in an Asian context. Japan has become an immigrant nation over the last four to five years,” Koll said.
He highlighted the polarised approach to immigrants in the US and Europe, where the debate about ideological skirmishes in politics, dismissing the need for an immigrant workforce to cushion shrinking populations.
“Japan is very pragmatic about the need for immigration...It might be the one G7 country that gets immigration policy right,” Koll said.
About Jesper Koll
Koll has been researching and investing in Japan since becoming a resident in 1986. His analysis and insights have earned him a position on several Japanese government and corporate advisory committees. In late 2016, Governor Yuriko Koike appointed Koll to her Tokyo Financial Center advisory board.
Koll has written three books in Japanese: Japan’s Economy – The Envy of the World (2017); The End of Heisei Deflation (2001); Towards a New Japanese Golden Age (1999).