Japan - in despair there is hope
Smart investors gravitate towards the unknown, ferreting in spaces where others fear to tread. It has struck me lately that out of all the strategists that visit our office to present on world affairs and particularly markets, without fail, not one ever talks about Japan. In fact, the typical discussion roots on emerging markets, little of which we have not heard a zillion times before.
Smart investors gravitate towards the unknown, usually ferreting in spaces where others fear to tread and these are not normally the sexy spots to be seen! Japan comes to mind as precisely such a destination.
Now if your response to reading my opening two paragraphs is one of utter dismissal combined with a cynical grin and passing thought that this writer requires an immediate dose of shock treatment as everybody knows that 'Japan is an economic wasteland', then you are certainly not alone, in fact, you are 'thinking with the crowds'. This psychological state is well documented in behavioural science and has its roots in the concept of 'safety in numbers' and investors typically extrapolate past performance into the future! But as professional investors, we know that when hope is gone, fertile soil for opportunistic investing is present.
Japan has the world's 10th largest population with 127 million people and boasts either the most or second most populated metropolitan area in the world, the Greater Tokyo Area, with 30 million residents. Striking and a sign of the times, is that few people know that Japan is still the world's second largest economy by nominal GDP (actual market value of all goods and services produced within a country). Instead, we always only hear about China, which is now quoted as the 2nd largest economy on earth, but this is on the basis of purchasing power parity which adjusts for the relative costs of living and inflation rates. It is undeniable that China's $5 trillion dollar economy is a new power house; our point is simply one that Japan's economy is a powerhouse too! Japan has the 10th highest standard of living in the world, the highest life expectancy (81.25 years), the 3rd lowest infant mortality rate and is the world's third largest donor nation in terms of official development assistance for other nations.
As early as 1868, the Japanese people embraced free market principles. Japan really came into its own as an economic giant in the 1960's when real GDP grew for a decade at 10% annually. This fell to 5% real in the 1970's and still powered along at 4% real in the 1980's. As we all know, in the late 1980's, the economic miracle which was Japan came to a calamitous end with the bursting of the stock market and property bubbles. One of the consequences of the economic collapse was that the Japanese Government undertook many ill fated public financing programmes to reignite the economy; this has led to public debt now accounting for 193% of annual GDP. But such depressing macroeconomic statistics distort the economic picture somewhat. Japan boasts very high levels of technological sophistication, the service sector accounts for 75% of GDP. It is one of the leading nations in scientific research with 700 000 researchers making use of the 3rd largest R&D budget in the world of $130bn and is the world leader in fundamental scientific research. Japan is the world leader in robotics. Of the Forbes Global 2000 list, representing the largest companies in the world, Japan contributes 326. Whilst public debt is certainly one of the serious draw backs for the economy, demographics are too. The population growth is negative and this implies that young people will increasingly be carrying the public debt in the years ahead. A shrinking work force also has serious implications with respect to maintaining dominance in global production and concomitantly, long-term economic growth. As an aside interesting point, Japan suffers from a very high suicide rate; it is the leading cause of death for people below the age of 30.
This is a fascinating country and one which can be spoken and written about for hours.