Japan’s New Year’s Resolutions
By Robert Scharar, President of FCA Corp and the Commonwealth International Series Trust mutual funds.
Having just spent two weeks in Japan, the Akemashite omedeto gozaimasu Happy New Year greeting was in the air so was the image of the rabbit which is this year’s zodiacal animal. As I interacted with Japanese people and read about and heard the issues that seem to be in the forefront, it seemed appropriate to see if these themes could be captured in a New Year’s resolution for Japan.
We hear a lot in the US about Japan’s business issues – a devalued yen, negative demographics, and natural resource-light geography. What we don’t experience or have a pulse on is the key issues for the Japanese people, the government and financial system. As one of the portfolio managers of the Commonwealth Japan Fund, a US-based mutual fund focusing on Japan, I felt it was important to understand these issues.
You cannot help but be impressed with the orderliness of the country. Kyoto, with its UNESCO world heritage sites, is a wonderful tourist destination. It is surprisingly easy to travel in Japan as an English-speaking person. Urbanization is impressive. Public transportation is reliable and convenient such as the JR-East Shinkansen train. The cities are clean and you would be hard pressed to find public bathrooms in the US that meet Japan’s cleanliness standard.
While you sense the population density, it is an amazingly orderly and courteous throng of people. I have to admit that it was different to be limited to the 60 minutes you could remain in the Nagoya Marriott Associa Hotel restaurant and club lounge. This was overshadowed by the great service and quality of the breakfast buffet. While the service industry is well staffed, there is a certain lack of flexibility so “bending the rules” doesn’t come easy. Maybe that is in part necessary to accommodate the sheer numbers. Masking is also still prevalent in Japan, with compliance being very high by the general public. When this will be loosened isn’t very clear, given the normalization of mask-wearing in Japanese culture prior to the COVID-19 pandemic.
As you leave the cities, you also begin to appreciate the large agricultural economy, the limitations the terrain and mountains put on available land, and the creative and efficient use of the land. Like many parts of the US, the non-urban areas seem to be struggling more and are impacted by the aging population as younger people move to the cities, seeking non-agricultural and non-traditional trades.
Here are my New Year’s resolutions for Japan. We also think they highlight, in some cases, opportunities for US investors.
Reduce the impact of the negative population demographics – The government recognizes this impact on labor supply and domestic consumption. So does the business communities. Prime Minister Fumio Kishida announced a doubling of the budget to deal with children’s issues and the formation of a new agency. Both are designed to support increased birth rates. The business sector is looking at further automation to better leverage the work force that is available. Increasing the formal retirement age is one way to access older workers. For some, this is access to a much needed “retirement supplement” as inflation has eroded the government pension payments and many more informal sector employees lack other sources of retirement funds. What does not seem to be on the table is significant changes to non-Japanese inbound immigration.
Provide for the mutual defense – China’s ambitions worry Japan. A significant increase in defense spending is about to happen. Under Japan’s recently endorsed National Security Strategy, the government will seek to increase spending to 2% of GDP versus the current 1% to allow it to obtain long range counter strike capabilities. As the chair and host country of the May 2023 G-7 meeting and only Asian G-7 member, Prime Minister Fumio Kishida has announced it will include on the agenda regional security in East Asia and alignment of policy towards China. To accomplish this, don’t be surprised to see Korea, Australia, and India invited to participate. This is all a part of the goal to realize a free and open Indo-Pacific vision.
Deal with inflation – McDonald’s Japan recently announced its third price increase in less than a year. Inflation in Japan reached a 41 year high in December. Japan’s inflation was primarily created by external factors such as resource supply shortages, which was especially painful to Japan due to its need to import many raw resources. As the world’s largest creditor, the December announcement by the Japanese Central Bank that it was considering adjusting its stance on bond purchases hasn’t gotten the attention it deserves. The raising of the ceiling on the 10-year bond rate can have major impact on the Yen, global cost of money to borrowers, and liquidity. Japan chose to not let the markets set the 10-year rate, but rather use its “asset purchases” to help control the yield curve rate which kept the rate very low and below the global rates. This policy could change, notwithstanding the January announcement to maintain its ultra-easy monetary policy, defying market expectations that rising inflation could force the central bank to move away from low interest rates.
Secure more energy independence/control of sources – Japanese companies are trying to lock in resources from more predictable suppliers. Russia currently supplies almost 10% of Japan’s 74+million tons of annual LNG usage. An example is Tokyo Gas’s announcement that they are working on a 4.6-billion-dollar deal to buy a US producer. Nuclear power is likely to be an ongoing and even increasing source of power. Currently furnishing about 6% of the nation’s power, there are 33 operable reactors in Japan, of which 10 reactors are currently operating. Additionally, 7 reactors have been approved for restart and further 8 have restart applications under review. The city of Fukuoka is a hydrogen pioneer, using biogas from sewage treatment to produce hydrogen for fuel cell vehicles at the world’s first hydrogen station. JR-East is testing a Hydrogen powered train. The JR East Group maintains an integrated energy generation network, from generation and transmission through utilization and is working to implement a system utilizing renewable energy, energy conservation, and energy storage. technologies to reduce energy consumption and CO2 emissions.
Reopen Japan – ANA and JAL recently announced that during the past holiday season, the number of international passengers increased five times from the past year. However, it was still half of the pre-COVID numbers. Japan needs the inflow of tourist and business travelers for several reasons. The financial support of the hospitality sector is important. More important, the increase of business travelers will lead to more opportunities including some virtual arrangements that can help with the workforce limitations. Lastly, out of sight – out of mind. Japan needs full engagement with the world and the international travelers are an important part of this.
The thoughts and opinions expressed in the article are solely those of the author as of January 25, 2023. The discussion of individual companies should not be considered a recommendation of such companies by the Fund’s investment adviser. The discussion is designed to provide a reader with an understanding of how the Fund’s investment adviser manages the Fund’s portfolio.