24th November 2014
Chisako Hardie, manager of the AXA Framlington Japan fund, discusses the factors behind Japan’s recovery and highlights stocks that are benefiting from this change…
Since Shinzō Abe was elected two years ago and Haruhiko Kuroda became Governor of the Bank of Japan shortly after, the two leaders have shown a determination and commitment to leave deflation behind. Kuroda has focused on expanding the bank’s balance sheet and the quantitative easing programme has been much more decisive this time around.
The main focus of Abenomics has been strengthening corporate competitiveness. It has taken a long time, but Japanese companies have recovered their balance sheets and capital expenditure is on an upward trend. Though usually seen as cyclical, the trend could last longer, considering the fact that companies procrastinated capital expenditure for a long time.
Small caps, big rewards
In this improving environment, growth companies can offer huge potential. Opportunities still exist in large caps, such as Toyota which is our largest holding, however small caps are covered less by researchers and so exciting prospects can pass under the radar for many. Ain Pharmaciez, which engages in the operation of pharmacies, is showing impressive growth potential as it benefits from the growing ageing population in Japan. The share price has trebled in the past five years, but we still believe the company has further to grow and we currently hold it in our portfolio. Many sectors in Japan are still highly fragmented and strong players such as Ain Pharmaciez have the potential to grow steadily.
Rise of the robots
As the economy grows, the labour market is tightening and wages are increasing, leading to a rise in the use of robots which enable improved productivity. This is a trend which has also emerged in China where labour cost is rapidly increasing. Robots are already commonly used in car factories but more recently robots are also used in other industries. Daifuku, an automation solutions provider, has benefitted from this now growing trend in Japan, and the increased capital expenditure by its corporate customers. Robot technologies are not limited to the industrial and manufacturing sectors. For example, Cyberdyne is a highly innovative company which invented robotic suits for patient rehabilitation in hospitals.
The electronisation of automobiles, whereby mechanical parts are replaced by electronically controlled units, is another growing trend. Iriso Electronics, a leading manufacturer of connectors, specialises in connectors used in cars. It is a structural growth business and it also benefits from a weaker yen. Its share price has increased fivefold since we first invested, five years ago, and yet we still find it attractively priced and will continue to hold the company.