Japanese companies are a surprising bunch: they are making record profits amid economic stagnation that has been lasting decades. And while opinions differ on the effectiveness of Abenomics, it was evident on my recent trip to Japan that fears over peaking corporate earnings are overdone.
Consider Daikin, the world’s largest manufacturer of air conditioning units, for example. This market is getting increasingly competitive with the entry of aggressive Chinese players that undercut prices with lower-quality products. However, Daikin has an extensive distribution network across countries and markets, including well-trained engineers and sales staff, which would take many years for rivals to even come close to.
High tech is everywhere
And of course the biggest competitive advantage for Japan is the high quality, cutting edge technology that is visible even in everyday life. Who said travel was exhausting? Japan was the first country to build dedicated railway lines for high-speed trains, and the ride on Japan’s Shinkansen bullet trains is very pleasant, with a seat virtually guaranteed thanks to their super-punctual departure at a rate of one every ten minutes. A 500 kilometre trip takes just two-and-a-half hours.
Technological advances are at the heart of Prime Minister Shinzo Abe’s plan to boost domestic demand through an economic virtuous circle. Earlier this year, speaking to the National Diet, he pledged to support research in the fields of artificial intelligence, robotics and the Internet of Things to make Japan “the most innovation-friendly country in the world.” Abe also praised the “dream robot suit” technology created by Cyberdyne as a prime example of what the country can achieve. I had the pleasure of trying one of these robot suits on.
Cyberdyne’s suits allow injured people to recover their body control as part of their rehabilitation programme. They are not meant to be worn as a substitute for a wheelchair, but are specifically aimed at patients to recover their intrinsic walking ability. The robot receives its motion instructions via sensors planted onto the skin. These detect the tiny streams of electric current running from the brain to the arms and legs. As a healthy person, it was difficult for me initially to feel the robot’s support. But with some additional weights strapped around my legs, the effect became palpable and was stunning to experience
Asians love “made in Japan”
The high quality of Japanese products is well recognised around the world and the Chinese in particular are keen to buy goods manufactured here. This even goes for ordinary household wares, such as diapers and detergents, benefiting firms like Kao, a chemical and cosmetics company. The strength of the “Made in Japan” label across Asia is very encouraging.
And for the first time I can physically feel that Tokyo has also become a popular travel destination. You now have to queue for your tax refunds together with lots of shoppers from around Asia, in particular China. As the Chinese middle class becomes wealthier, I believe that this trend is here to stay and not only owed to the weak yen.
I was also encouraged by managements’ commitment to embrace shareholder value more strongly than in the past, hence opening new opportunities to generate returns for investors. A more proactive implementation of the government’s new corporate governance code, which took effect in June last year, should also lead to continued M&A.
Anecdotally, the labour market in Japan, especially in the services industry and in the major cities, is getting very tight. A fine food restaurant owner shared with me that he has a hard time finding service staff, and young people dare not to show up for scheduled job interviews. This was previously unthinkable and speaks volumes about the true state of the Japanese economy.
Reiko Mito is portfolio manager at GAM.