CONTRIBUTORS
Dina Ting, CFA
Head of Global Index Portfolio Management,
Franklin Templeton ETFs
During a recent trip to Japan, I felt fortunate to be able to catch the country’s cherished “hanami,” or “flower viewing” season. The delicate and beautiful blossoms were on full display then, although only briefly before rain showers left them looking like snowfall on Tokyo streets. Nonetheless, it was great to be back and traveling through post-COVID Asia, which is bustling with the return of both leisure and business visitors.
Tourism to Japan has been surging, with entries rising exponentially since the country reopened last fall. In March, Japan notched 1.8 million foreign visitors, and it is now on track to receive 20 million visitors this year.1 Besides the welcome rebound in arrivals, renowned investor Warren Buffet’s recently renewed attention to several Japanese trading giants has meant more positive developments for Japan.
The value-investing guru’s Japan stock picks are basically conglomerates with reach into many sectors represented in the country’s broad market. In particular, these represent the top sector of the FTSE Japan Capped Index, industrials (22.6%), as well as in the index’s fourth largest sector, financials (10.5%).2 Year to date, the index is up nearly 7%, led by industrials.3 The positive potential diversification story has naturally piqued investor interest. In our analysis, there are more reasons to consider a Japan allocation for the long run.
A reboot to Japan’s semiconductor industry
Japan is set to join other countries in a buildout of leading-edge semiconductor capabilities, which is being prioritized following the pandemic’s halt to global commerce and rising trade conflicts. Japan’s Rapidus—a newly formed foundry for advanced chip manufacturing, a quasi-public venture with IBM Research—is set to receive more government funding for microchip fabrication plants (fabs) in Hokkaido. Japan plans to differentiate its business from other foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), Samsung and Intel with an impressive consortium of its own that has corralled major firms such as NTT, SoftBank, Sony and Toyota. The country’s strong manufacturing ecosystem of materials, equipment and engineering talent will help Japan-based fabs.
New policies to tackle aging demographics
The issue of graying societies is not exclusive to Japan. Amid China’s declining birth rate, the country’s colleges extended spring break this year to give students more time to “learn to enjoy nature…and enjoy love.” For Japan, there is also some optimism in a host of new measures aimed at incentivizing people to have children. These plans include:
- Broadening free school meal programs
- Student loan repayment support for expecting families
- An expansion of scholarships and child support payments, which were previously subject to income caps, to all families
- Additional income for fathers who take paternity leave, matching their post-tax salary
- Expanded housing support for families with young children
Wages and pay equity
The Bank of Japan’s dovish stance, announced on April 28, to support wage growth through continued monetary easing sent the yen lower while lifting stocks. This may help Japanese manufacturers as a weak yen should boost the value of their repatriated profits and make their exports cheaper.
On the flip side, consumers in Japan may face more struggles with cost of living. This is one reason that Japanese Prime Minister Fumio Kishida has emphasized the need for wage growth and policies to address pay inequality.
He opened his speech at the New York Stock Exchange last year in similar fashion to one delivered five years earlier by his late predecessor, Prime Minister Shinzo Abe, with humor and baseball metaphors. He then called for salary increases to beat inflation. In March, there was progress on this front when the country’s main labor unions won a preliminary agreement for wage hikes of 3.8%—the largest raise since 1993.4
To address an area in which “Abenomics” policy arguably failed, Kishida called for an “essential” new system to draw more individual assets into markets, referring to a “new form of capitalism” for wealth redistribution. To this end, he proposed making the country’s tax-exemption system a permanent program, saying that such incentives are needed because Japanese households have about US$14 billion in personal financial assets but “only around 10%” invested in stocks.5 Turning the dial on that–even a little–could make a big difference for Japanese equities. We believe investors looking for exposure may find Japan-focused passive exchange-traded vehicles as a compelling means to gain a low-cost diversification to Japanese stocks.
Endnotes
- Source: Japan National Tourism Organization 2023
- Source: FTSE, as of April 27, 2023. The FTSE Japan Capped Index is based on the FTSE Japan Index and is designed to measure the performance of Japanese large- and mid-capitalization stocks. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results. See www.franklintempletondatasources.com for additional data provider information.
- Ibid.
- Source: Bloomberg, March 16, 2023.
- Source: Kizuna, “PM Kishida’s Speech on the New Form of Capitalism and Why Japan Is a “Buy,” June 23, 2022.
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