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Why Japan’s demographics scream ‘buy’



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Ageing Japan has a problem with its plumbing. The country sits atop 740,000 kilometres of water pipes, of which just over a fifth are past their 40-year, legally recognised working life.

And as the pipes decay and leak, the nation’s water engineers grey and creak. In a shrinking population, the number of Japanese employed in the industry is 36 per cent below its peak while the average age of those left toiling on the mains is rising. Replacing the whole network, at the current work rate, will take 150 years, during which things could get messy.

This, roughly, is the mud-and-stars conundrum facing global investors as Tokyo, the prime minister and the financial industry host an unprecedented “Japan Weeks” promotional campaign entreating them to fill their boots with stocks and faith.

Even with global funds steering away from China, Japan is a much harder sell than it looks. Foreign interest is sky high but global funds have failed to bet big because of those gnawing doubts about the economic future of the world’s fastest-ageing major country. The nation’s electronic toilets may sing the sweet hymn of industrial brilliance; the rusting pipes below emit a dirge of unstoppable decline.

But this hesitancy by investors may be a huge wasted opportunity. Japan’s demographics — for all the socio-economic hand-wringing they cause — are now arguably the biggest “buy” signal the country has sent for decades.

None of this is to deny the fundamental problems Japan faces in its dotage. China’s ageing, shrinking demographics are set to be a key determinant of the country’s economic trajectory, and an increasingly stern test of its leadership. Japan started this process at a much higher level of wealth, is acutely vulnerable to many of the same challenges and has borrowed the equivalent of 263 per cent of its gross domestic product to help stave off the first waves of those.

And yet, in several critical areas, Japan’s demographics are aligned to work strongly in favour of companies and investors. The first of these arises from labour shortages and the profound psychological difference they make to corporations’ ability to restructure. After the 1980s bubble burst, when the government was in terror of mass unemployment, companies were induced by tax breaks to hold on to staff even as that hurt their profitability and nimbleness. Strict labour laws doubled the burden by making it very hard to lay people off.

One of the most striking consequences of this was that companies had to create divisions and businesses to store their excesses of staff. Investors — and increasingly the companies — bemoan the sometimes vast portfolios of non-core businesses created to answer the political expectations of businesses then.

As labour excess switches rapidly to deficit, suggest analysts at CLSA Securities, those obligations are lifting and companies can suddenly unbundle themselves from that history, divest everything non-core and focus instead on what they are best at. These divestments, fundamentally driven by demographics, look ever more like an all-you-can-eat buffet for industrial and financial acquisitions. 

Closely linked to that is the prospect that corporate Japan finally embarks on the kind of domestic mergers and consolidation that would enlarge its diminishing stock of world-class national champions. Domestic M&A historically stalled because of fears that it would trigger large lay-offs: again, the evaporation of that concern is liberating.

But perhaps the far greater demographic dividend in Japan’s immediate future, argues SMBC Nikko strategist Hikaru Yasuda, is in the area that is least often considered — the impending power shift in favour of young Japanese, and the generational change in mindset that will transform corporate Japan in coming years.

The key is the generation born between 1981 and 2000 and what happens as they hit their thirties and forties and form the backbone of the economy, says Yasuda in a report. Japan’s “boomer” and “bubble” generations experienced Japan’s frothiest peak, but also lived through the “lost” decades that followed and the stagnation of stock and property valuations, he says. 

The so-called yutori generation, which entered the workforce in the 2010s, is meanwhile blessed with three entirely fresh views on the world. It has no affinity with seniority-based pay and lifetime employment, it is digitally minded in a way that other generations have never become comfortable with and, as it contemplates how to invest savings effectively, it has watched Japanese stocks rising steadily to ever greater highs. 

Japan’s pipes may be ageing. Its pipeline, meanwhile, is looking healthy.



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