Hidden gems in Japan’s overlooked market

A professional investor tells us where he’d put his money. This week: Eiji Saito, investment manager, JPMorgan Japan Small Cap Growth & Income

Japan is home to a vibrant yet underresearched stockmarket, where the emergence of a dynamic new generation of companies is creating compelling investment opportunities.

Of the 2,000 stocks in the Topix index, well over 50% are covered by no more than one sell-side analyst, which can lead to pricing inefficiencies. This makes Japan an attractive market for active, bottom-up investors on the ground in Tokyo.

More room for renewables

Japan is at a very early stage in its transition to greener energy sources. Around one third of Japan’s energy is currently sourced from coal, and it remains heavily reliant on natural gas.

However, the government’s commitment to reducing Japan’s emissions to net zero and realising carbon neutrality by 2050 presents an interesting opportunity. The move to renewables should help reduce dependence on imported fossil fuels. We expect the contribution of wind, solar, biomass and geothermal power to rise significantly.

We believe Renova (Tokyo: 9519) ,the only Japanese utility focused solely on renewable-energy sources, is particularly well-positioned to lead the expansion of Japan’s renewableenergy industry.

The group operates solar, biomass, and onshore and offshore wind power plants in Japan and has an established track record in both the development and operation of renewable-energy plants.

Updating the world of work

Many Japanese businesses have been slow to digitalise. IT systems tend to be old and paper-based work is still commonplace across many offices. For example, the culture of hanko – the practice of physically providing a personal stamp rather than a signature – is still widespread, presenting a hurdle to remote working.

However, the pandemic has prompted many Japanese companies to reevaluate their business customs and models to help improve productivity.

Against this backdrop, we believe the Japanese digital-contract market has significant growth potential. According to current forecasts, the total market could reach ¥400bn (£2.6bn) over the longer term, with substantial growth on the cards over the next five to ten years.

Bengo4.com (Tokyo: 6027) isa pioneer and market leader in this field, providing cloud-based digital certification services through CloudSign – the equivalent of DocuSign – as part of its product range. At present Bengo4.com boasts an 80% market share of registered companies.

Japan’s Etsy

Japan has also been slow to transition to online shopping, with the e-commerce market still only comprising 8% of sales. Nevertheless, the pandemic has driven many retail businesses online, and we have seen an increase in demand as consumers embrace online shopping on a more permanent basis.

BASE (Tokyo: 4477), similar to Etsy in the UK and US, provides an e-commerce platform for smaller companies and individuals. It is a quality company wellpositioned to meet the rising demand for online retail platforms.

It helps users set up online stores quickly and easily without incurring fees, and has continued to perform well despite volatile market conditions.

“The e-commerce market still comprises just 8% of total sales”