The Japanese changemakers shaping the future

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A frequent visitor to Japan, Matthew Brett has noticed a change since pandemic-era travel restrictions relaxed.

“There’s been a complete shift in mindset when it comes to money,” the investment manager tells our Short Briefings on Long Term Thinking podcast.

“It used to be the case that you’d be daft to go to Japan without a big pile of cash. But in recent trips, I’ve come across card-only restaurants, which would be unbelievable even a few years ago. I’ve even come across a convenience store that would only take cards.”

Japan used to be “a laggard” in terms of ditching coins and notes, he adds, but an appreciation that “electronic money is just a lot cleaner” appears to have given the country the nudge it needed.

The phenomenon is evidence of Japan’s broader embrace of ‘digitalisation’ – a shift from paper-based systems to digitised data accessed via software and the internet. And it’s one of four structural growth trends that Bailie Gifford’s Japan Team identified in its paper Japan: the next opportunity as having the potential to drive outperformance over the years ahead.

Brett gives Rakuten as one example of a business in digitisation’s vanguard. The firm’s activities range from online credit cards and in-store QR-barcode-based payment systems to mobile connectivity, as well as internet-based travel bookings, shopping, TV and stock brokerage services. A loyalty rewards scheme links the services together.

“If someone uses more than one service, the discounts add up and multiply together,” Brett explains. “And because Rakuten evolved most of these services internally, they all use the same ID. So it's really easy for a customer who signed up to the Rakuten Bank, for example, to become a customer of Rakuten Mobile because most of the needed information is already present.”

Robotic vision

Accelerating automation is a second example of a transformational force creating a growth opportunity. Japan produces 46 per cent of all industrial robots, according to the International Federation of Robotics. However, Brett thinks we are still “at the bottom of the foothills of the opportunity” that the sector presents.

“The problem with robots right now is, to be frank, they're a bit thick,” he explains. “They don’t always know where they are and that makes them very dangerous. But if you develop machine vision and the robot has awareness of what is around it, then you can get ‘cobots’, where the robot can be packing boxes alongside a human. And if there’s contact between the robot and the human, well, as long as the robot stops moving quickly, it’s OK.”

Keyence is one example of a company driving progress in this field. It makes machine vision sensors with built-in artificial intelligence that can spot one faulty screw among thousands and inadequately sealed food packaging. Fanuc is another. It creates robots designed to work in close proximity to humans in factories making automobiles, pharmaceuticals and electronics, among other products.

The rising wealth of Japan’s Asian neighbours is the third growth driver. The continent is home to about five billion people, many of whom have growing discretionary spending power.

“Within the region, Japan is the most developed country and therefore has things other people desire,” Brett says. He points to skincare brands KOSÉ and Shiseido as being two portfolio companies poised for long-term growth thanks in large part to their heritage.

“There are some areas of life where people can create new brands relatively quickly,” he says. “Skincare tends not to be one of those areas. It is difficult. People have great loyalty to brands in a way that they don't to other types of products.”

Alzheimer’s and ageing

Meeting the elderly’s unmet healthcare needs is the fourth structural growth driver. Japan famously has the world’s oldest population – more than one in 10 of its inhabitants is over 80 and almost a third of its population is over 65. Brett notes, however, the opportunity extends beyond its own borders.

His team recently took a stake in Tokyo-based Eisai, maker of the Alzheimer’s drug Leqembi. The disease and other forms of dementia are the UK’s leading cause of death.

“Leqembi is the first drug to market which can slow the progression of Alzheimer’s,” Brett says. “It can help people once they've developed symptoms. But what’s interesting is it appears that the drug, over time, clears some of the amyloid plaques [linked to Alzheimer’s] from the brain. That raises a really interesting question: could you start the treatment earlier? Eisai’s got a trial going on at the moment looking at that.”

Japanese growth companies haven’t historically attained the scale of some of their western counterparts. However, Brett suggests that only adds to the appeal of finding and backing those capitalising on change.

“Japan has well over 1,500 listed companies,” he says, “and when I looked recently, the US chipmaker NIVIDA as a single firm was worth roughly three-quarters the value of the entire Japanese market.

“From the perspective of opportunity, that suggests that if you find a company in Japan that can grow its earnings over time, you’re unlikely to pay a super-high price. And that’s exciting as a long-term patient growth investor.”

Hear more of Matthew’s thoughts, including his take on snack maker Calbee’s approach to innovation, by subscribing to Short Briefings on Long Term Thinking on Spotify, Apple Podcasts or any other podcast app.

Read more about the growth drivers Japanese companies are seizing on in our paper, Japan: the next opportunity.

Words by Leo Kelion

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