Owing to shrinking demographics, Japan benefits from low unemployment, while labor market institutions provide greater protection to household incomes. Greater job security can underpin continued consumer spending in a manner few countries can count on.
In addition, owing to the debt trauma of the 1990s when banks reined in lending and starved companies of working capital, Japanese firms remain relatively cash-rich, with 55% of non-financial firms in a net cash position, versus 14% for companies in the U.S.
Financial leverage has also fallen for six years in a row. This leaves Japanese firms better placed not only to withstand the coronavirus slowdown, but also to implement growth initiatives despite lack of clarity over near-term earnings prospects.
In conjunction with post Covid-19 recovery plans, Japanese firms are enhancing their environmental, social and governance (ESG) credentials. We’re seeing positive changes on capital efficiency and governance.
For now, markets are flitting between priming for a sustained recovery and bracing for fresh waves of the pandemic. Investors prepared to ride out the volatility can find companies positioned to prosper over the longer term by making themselves leaner and more productive.
Japan remains home to a number of world-class companies. Many are global leaders in their industries, have solid franchises and are operating in areas of structural growth—be it in robotics, consumer staples or health-care innovation. Irrespective of the coronavirus pandemic and whether Japan receives a tourism boost from a rearranged Olympics next year, quality firms can continue to deliver growth to shareholders.
Kwok Chern-Yeh is manager of the Aberdeen Japan Equity Fund at Aberdeen Standard Investments.