Given the shrinking base at home, mid to larger Japanese corporates are actively investing outside of Japan to capture revenue and market growth. It is no surprise, therefore, that Japan's outbound foreign direct investment rates are on the rise with much of that Japanese money flowing into South-East Asia with Thailand, Indonesia, and the Philippines being key target markets.
Australia remains an attractive place to invest given the security of our banking and regulatory system (at least for now!), but many Japanese corporates are keeping a careful eye on policy announcements in the lead up to the Federal election, which is due sometime between March and May 2019, particularly from the Labor Party who remain well in contention to take power. They have recently announced some policies which are seen as hostile to investment, and Japanese investors are taking note.
Helpfully, the Trans-Pacific Partnership deal "TPP-11" (excluding the US) was signed on 8 March 2018, grouping Japan, Australia, and nine other Pacific Rim countries in a free trade agreement of "unprecedented scope and ambition" (DFAT) and is expected to take effect early 2018.
The lead-up to the 2020 Tokyo Olympics is driving some economic activity, but a recent survey of major Japanese companies confirms that it is not expected to last much beyond the event.
As the prognosis for 2065 suggests, one of the issues is the declining workforce. Major Japanese corporates are sceptical about the impact that Prime Minister Abe's 'make more babies' policy will have and are looking to artificial intelligence (AI) and the introduction of other technology to boost productivity. This is sparking increased investment in these fields. The chairman of the Hiroshima Manufacturing Engineering Association (a consortium of Mazda suppliers and IT companies) recently announced a strategy to tackle labour shortages by "creat[ing] unmanned production lines than can operation 24 hours a day, 365 days a year".
AI is perhaps the biggest agenda for the future of Japanese manufacturing and even retail businesses. The major convenience store chains such as Family Mart, Lawson, and Seven-Eleven are all actively pursuing AI, with the aim being to launch unmanned stores sometime in the future. At present, many convenience stores have staff from China, Sri Lanka, and Nepal working in them due to a shortage of Japanese recruits. Should this model be perfected in Japan, it may well spread overseas.
One of our insurance clients noted that the domestic/personal insurance segment of their gross revenue is expected to be cut by 50% as a consequence of declining population and a developing trend of reducing car ownership across Japan. In the straw poll of clients we met, only 25% had a car! You might think that Uber was to blame but, in fact, ride share companies are basically shut out of Japan under stringently enforced Government regulations that outlaw non-professional drivers from transporting paying customers. We love the quirky Japanese taxi etiquette so are happy to see it protected — but we suspect it won't last forever (http://fortune.com/2018/05/22/uber-japan-taxi/). But we digress…
In response, insurers and other corporates need to find new markets to fill the gap. So, Tokio Marine & Nichido announced a new drone insurance product on 6 August 2018, and are marketing it to a tech savvy world (http://www.tokiomarinekiln.com/about-us/five-things-you-may-not-know-about-drones/). Japanese regulation of insurers is notably relaxed of late to permit Japanese insurers to make investments in technology, which would otherwise have been a breach of their prudential licence conditions. This has rapidly increased their appetite for insurtech opportunities throughout S-E Asia and into Australia (refer TMK's investment in Evari Insurance earlier this year).
One of the most consistent themes from our trip was the growing appetite for corporates to invest directly or indirectly in start-ups — in order to secure first-right opportunities to acquire the business in an exit scenario or a first-right to licence or commercialise the technology or product once funded through a proof of concept stage. Even when investing indirectly through a VC fund, they are getting and actively using a direct line of sight to the portfolio company. In tandem with their own traditional development work, this is a new strategy developed over the last two years in the race to secure the next product or technology ahead of competitors.
Of the domestic workforce that remains, there is certainly a shifting in the balance of power between workers and employers. Companies are being forced to offer perks and lifestyle benefits that go beyond mere dollars and the promise of job security to attract job seekers. Unheard of previously in Japan, workers are now demanding flexible working hours, personal benefits like on-site day care, free food, and subsidised rent, and formal mentoring programs. There is certainly work for HR professionals and organisations to bring these common Western approaches to people development to an increasingly interested pool of Japanese corporates.
Another interesting development is the re-thinking of where to locate offices and manufacturing sites in order to tap into a source of labour where competitors are not so prevalent. Jtekt, an automotive component manufacturer, opened a new technology development center in Akita Prefecture (more agricultural than manufacturing) last year, where it will develop technology for self-driving cars and has a need to double its engineering workforce. Others are moving in the opposite direction to more city-based locations where the lifestyle for employees is more attractive in a bid to get them to stay with the company. All options are open in the pursuit of talent!
Japan’s banking system lags behind the rest of the world in many areas. For example, it is still not possible to use a foreign ATM card in Japan’s major banks’ ATM machines. You have to go to a Seven-Eleven store or to the Post Office. The same applies to tap-and-pay systems in Japan’s retail stores — only certain domestic electronic money systems can be used, such as the electronic cards used in public transport. Yet, with the World Cup Rugby coming in late 2019 and the 2020 Tokyo Games soon thereafter, the Japanese Government has suddenly realised that, without a revolution in electronic payment systems at a retail level, the millions of foreign visitors for these two major sporting events will find Japan a very difficult place to go shopping and eat out. Recently the Government tasked the Japan Post Office to spearhead an effort to introduce retail payment machines compatible with foreign credit and debit cards.
Another less obvious aspect of Japan's focus on market growth is the overhaul of its 2015 Corporate Governance Code for listed companies.
Following a number of high profile management problems at several large Japanese companies, the Japanese Financial Services Agency announced wide-ranging changes to the Code in order to bring Japan closer to global governance practices. This will include, for the first time, "if not why not" reporting for companies who do not adhere to any of the principles, as already applies in Australia.
It is hoped that the new measures will restore the confidence of local and foreign investors. Indeed, one of the changes — to require the unwinding of strategic cross shareholdings (e.g. with customers and friendly counterparties) — directly opens up new opportunities for investors as Japanese companies sell off such stakes to show compliance. US investors are already notably more active on the Tokyo Stock Market.
Other measures include greater diversity on boards (56% of Japan's major companies have no female directors and women fill fewer than 5% of all board seats), increasing board responsibilities (emphasising the need for the board to fire underperforming CEOs), and calling for a majority of independent directors on boards and, if not, the establishment of independent advisory committees. These might seem the norm in Australia, the UK, and the US, but there are cases in Japan of the CEO sitting on his own compensation and nomination committees!
With a recent Goldman Sachs report suggesting that improvements to environmental, social and governance issues (ESG) can reduce risk and contribute to increased returns for shareholders, it is no surprise that one of the sogo shosha (large Japanese trading houses) that we spoke to has recently established a new ESG Department to find ways to drive focus and capitalise upon market sentiment in the ESG arena.