2023 saw a number of groundbreaking developments in Japan including the Tokyo Stock Exchange’s (TSE) initiatives to encourage greater capital efficiency and the Ministry of Economy, Trade and Industry (METI) guidelines on corporate takeovers. The head of the Tokyo Stock Exchange was also on record saying that companies should embrace activism as activist investors and private equity have continued to grow their presence in the Japanese market.
The events of 2024 provided ample proof that these initiatives are yielding results, and we have seen the impact reflected in our portfolio both directly and indirectly. Directly, this was evident through the purchase of Outsourcing by Bain Capital, the competitive bidding for Topcon by KKR and EQT and the approach for Seven & I holdings by Canadian company ACT. Indirectly, we have seen subsidiaries of Teijin and Alps Electric taken private by Blackstone and KKR. Activists have also been involved in a number of our portfolio holdings and companies have been responding to the pressure to increase capital efficiency themselves, with record buy-backs and dividends announced. Throughout the year, we met a lot of companies and believe there has been a palpable change in managements’ attitude to shareholder engagement.
The last couple of years have also seen changes in attitudes towards Japan as a desirable and competitive manufacturing base. Heightened geopolitical tensions placed greater scrutiny on supply chains and it appears Japan is emerging as a winner. Japan ranks first out of 145 countries in Harvard University’s Economic Complexity Index which measures the current state of a country’s productive knowledge by analysing the complexity of products they export.
This productive knowledge undoubtedly contributed to TSMC’s decision to build a plant in Japan. TSMC’s Kyushu plant, which opened in February 2024, was completed on time, contrasting with delays announced for their facility in Arizona which has suffered from a shortage of specialist workers. Many Japanese manufacturers have also highlighted similar difficulties they faced trying to operate in the US recently, due to a lack of skilled workers and high staff turnover. The incoming US administration’s desire for onshoring of manufacturing may be easier said than done.
Overall, Japan is increasingly viewed as an attractive location to invest, whether it’s for portfolio investors looking at listed assets or companies seeking to diversify their supply chains . Stock market valuations remain attractive with TOPIX valuations in the bottom decile relative to the rest of the world.
Investors should be aware that some risks exist, the foremost of which seems to be whether the incoming US administration will implement tariffs on Japanese exports. Japan had a very good relationship with the previous Trump administration and is a key ally in the region so we are hopeful a deal can be reached. Other risks we are monitoring for include a rapidly strengthening Yen and continued subdued economic activity in China.
We believe that a combination of good balance sheets, attractive valuations and an irreversible change in corporate behaviour signals a positive outlook for investors heading into 2025.
By Ben Williams, Portfolio Manager of the Arcus Japan Fund
