It's been a long time since Japanese companies received much
love from investors. Even as Asia has become the investment
destination for both retail and institutional investors looking
to get a piece of the region's growing economic prosperity, most
funds make it a point to avoid Japan, a country that's struggled
with deflation and a weak economy for decades. But Neil Hennessy,
portfolio manager and chief investment officer of Hennessy Funds,
makes the case that that Japan is undergoing a structural
transformation that will alter the face of the Japanese
government and the way the nation does business.
Why Japan and why now?
The exact same question went
through my mind: Why? You can't find
an uglier chart. The Japanese market
has been down for 20 straight years, so
you can't blame people for not being
energetic about its prospects. But you
have to remember that you're buying
global companies headquartered in
If I look for value names in theUS
based on price-to-sales ratios, why not
apply this valuation metric toJapan's
Topix Index? By this measure, you
can buy a dollar of revenue today for
The last time I saw that was March 2008, when you could buy a
dollar of revenue for 60 cents on the Dow Jones Industrials.
In the BRIC nations (Brazil,Russia,India, andChina) and the
emerging markets, it costs $1.80 to buy a dollar of revenue.
Japan's market is highly regulated, and it's the second-largest
economy in the world why pay three times the price to sales to take
on the added risk of emerging markets?
It's true that over the last 10 years the BRIC markets are up
465 percent, while Japanese equities are down 41 percent. And
quantitative measures don't paint a pretty picture: the population
is aging, the workforce is shrinking, fewer babies are being born
and the country is saddled with debt. None of these stats inspire
Why would I want to invest in Japanese equities? Two major
shifts are underway in the country.
The first factor is the change in government that occurred last
Although there have been a lot of false starts with new
governments over the years, this is a really proactive government
that wants to see Japanese companies to do well globally.
For instance, the government recently had representatives in
theUS trying to win contracts for Japanese companies to build
bullet trains. It's unheard of for the Japanese government to try
to sell other countries on the virtues of its companies.
The new government also wants the economy to be a bit more
consumer driven. It also wants tourism to multiply to four times
its current level. Right now, about 6 million tourists go to Japan
annually; they want to increase that number to 25 million people.
Only 125 million people live inJapan; meeting this goal would
involve 25 percent of the population coming in and out every
One of the interesting parts is thatChina is three hours away,
and 1.3 billion people live there. We also know that the Japanese
and the Chinese have had strained relations for centuries.
Up until recently, the Japanese government required a Chinese
citizen seeking a visa for anything other than business or
governmental purposes to travel with at least four people and a
tour guide. But as of July 1, if a Chinese citizen makes
approximately USD35,000 or more a year inChina,Japan will grant
that person a visa to travel wherever he or she wishes.Japan is
marketing itself to the Chinese as a tourist destination.
The other major story is that Japanese corporations are
Until the early 1990s, the government controlled the banks, and
the banks controlled the public companies in which they invested
because they were their clients. Other shareholders were just sort
of dangling out there.
Then came the banking problems in the late '90s and early 2000s,
when the major banks had to divest liquid assets to shore up their
What where those liquid assets? Shares of public companies, many
of which were sold to foreigners who demanded much higher returns
on their money.
That's forced Japanese companies to become more transparent,
more open and more shareholder friendly. This shift is driving a
desire to generate higher profits and to pay dividends.
The Wall Street Journal recently ran a big story about the fired
president of Fujitsu (Tokyo: 6702, OTC: FJTSY).
The company had a board of nine people who refused to talk to
the reporter, but the displaced president stated that he wanted to
close unprofitable businesses and remove layers of middle
That's an enormous cultural shift for the Japanese; the board
didn't see things his way, leading to his dismissal. The deposed
president has sued Fujitsu for wrongful termination-an unheard of
Sony Corp (
) is another example of this cultural shift. The electronics giant
has struggled to make its manufacturing plants profitable, so
management sold two television plants to a Taiwanese company.
And consider Nippon Sheet Glass (Tokyo: 5202), one of four
companies in the world that makes windshields and big sheets of
glass. Management just hired an American who formerly worked for
) to run the company inTokyo.
The Japanese view of business is clearly changing, and these
companies are shifting to become global enterprises. Disregard all
the negatives associated withJapan and remember that you're
investing in global companies that just happen to be headquartered
The game of employment for life is over, the bureaucratic
government is gone, the old-boy network is gone andJapan is
entering a new era.
How competitive can Japanese companies really be in export
markets? Can't other countries in the region produce goods more
Over the past 20 years the Japanese market had a lot of false
starts because many investors assumed the Chinese and Indians would
purchase a lot of consumer goods. But households in these emerging
markets bought the necessities-not lifestyle products.
Now consumers inChina andIndia have moved beyond necessities;
now they want things that enhance their quality of life.
This sounds simple, but it has bullish ramifications for
companies like diaper-maker
(Tokyo: 8113). A diaper isn't a necessity inChina, but 18 million
babies are born every year.
Now Chinese families want diapers, bottles with nipples on them
and feminine hygiene products-all simple products that enhance
quality of life. Now that the Chinese are becoming wealthier,
they're buying more and more of these things.
If you think aboutJapan's relationship with theUS, the Japanese
made the Americans happy by building cars, televisions and
electronics for us.
Now our markets are saturated, but the huge number of new Asian
consumers is a massive opportunity for Japanese companies.
And Chinese manufacturers can put out a lot of units, but the
quality is lacking. That's an issue as Chinese consumers become
Are there any key industries that investors should
In the 1960sJapan had a major problem with pollution, which it
has since cleaned up. In the process, Japanese companies gained a
lot of know-how about remediation processes.
Many ofChina's industrial cities are in a similar situation
today and are looking for ways to clean up the mess. Well, guess
what? Japanese companies can do it, and they're just three hours
What's the biggest reason for investors to look atJapan
As the Japanese market turns the corner, its performance will
resemble that of emerging markets. Why take on the added risk of
investing in emerging markets that can be fraught with criminals
Japan's markets are highly regulated, and while scandals do
occur, they're far less frequent than in emerging markets.
AlthoughJapan certainly isn't as sexy as the BRICs or other
emerging markets, there's a ton of money to be made there.
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