This heavy metal classic by Twisted Sister is on the soundtrack for the 1986 movie “Gung Ho.” In the movie, Michael Keaton plays an employee at an American car company that gets purchased by a Japanese firm. The new foreign owner of the All-American automobile factory demands performance improvements, or the plant will be closed. The concerns over the Japanese taking over America with more efficient processes hit home for me. At the time, my father worked for Harley Davidson, which was having trouble competing with Honda, Kawasaki, and Yamaha.
Both Harley and the fictional company faced bankruptcy. Akin to the company in the movie, Harley adjusted and flourished. Today, the stories serve as a distant reminder of a time when the world feared Japan’s business culture as a threat to US manufacturing.
The Japanese dominance faded, and the good people of Japan faced a multi-decade economic decline. Despite the lost decade(s), the Japanese economy remains the third largest in the world - behind the United States and China. And, the business culture also adjusted over a painful few decades. In the past several years, the Japanese stock market (Nikkei) has made a nice bull-run but is still below levels since its peak in 1989.
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While America remains dominant, we find our country in an interesting stage of this economic cycle. Thus, we look outside our borders for diversifying opportunities in countries at a different stage of their business cycle. Our portfolio has held modest exposure to Japan for all of 2023, but we have recently added more.
Japan finds itself at a unique economic spot in the world. The main drivers for our optimism are:
We believe the factors above have the Japanese market poised to continue its rebound. The most important factor - the large amount of cash on personal and corporate balance sheets.
There is an estimated $12 trillion of wealth held in Japan. It is reported that 50% is held in cash. With inflation up and rates going higher, it is likely the individual investors will begin to move cash into stocks as they seek returns over the rising inflation.
A similar phenomenon is true for corporations with high cash holdings on balance sheets. Corporations could also loosen up their purse strings and:
There are certainly challenges to consider when investing in Japan. We admit the demographics are not particularly strong. The country has the highest population of elderly citizens in the world. According to the World Economic Forum, of the 175 million citizens, it is estimated 29.8% are 65 and older. However, this is a counteracting force brewing in the country that presents an attractive opportunity for U.S. equity investors.
In addition, the central bank of Japan will be faced with many difficult decisions when adjusting policy from here. Wages have experienced low growth rates and corporations will have to adjust. But, we believe these changes could lead to a more normalized decade for the country's stock market. It will require patience and not happen overnight.
We believe this ‘secret’ will get out soon and many investors who are not currently allocated to Japan will find the valuation attractive, and funds will begin to flow into the country’s stock market. Further, it is possible a portion of the assets invested in China will be reallocated to Japan as China faces serious economic headwinds.
There are still many challenges in the Land of the Rising Sun, but we believe it could be beneficial for investors to have exposure to the compelling opportunities abroad as the US enters a slowing period.