Three reasons to invest in Japan

Retail, health care and property sectors poised to benefit from the ongoing positive impact of Abenomics.

Emma Wall 14 April, 2015 | 5:00PM
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Would you travel more than 1,500 kilometres just to buy a bag of disposable diapers? Thanks to a favourable exchange rate, a growing disposable income and a certain designer cachet to the Kao brand, the new Chinese middle class is doing just that. The demand is such that retailers in Tokyo are restricting shoppers to just two packages per trip.

It is not just diapers that tourists cross the East China Sea to snap up. Certain Japanese goods are synonymous with the best possible quality, and as well as designer diapers -- which Chinese mothers send their babies to nursery in, keeping domestic brands for wearing at home -- tourists are buying multiple knives, toilet seats and thermoses.

"Tourism in February was up 58% over the year before, boosted by the Chinese holiday season," said Simon Somerville, portfolio manager at Jupiter Asset Management.

"It's not just the weak yen that is attracting Chinese tourists, it's the ongoing story of the growing Asian middle class," Somerville said. "They have money for the first time and want to see more of the world. Japan is the perfect destination for your first holiday as their culture is so accommodating to visitors. There is very little crime, and they would never dream of ripping you off. Locals and visitors pay the same price."

Japanese retailer Don Quijote Holdings, which sells everything from second-hand luxury leather goods, fancy dress outfits and musical instruments, to the diapers, knives, toilet seats and thermoses favoured by the Chinese, garners 10% of its sales from tourists. These eclectic retailers may baffle Western shoppers -- including this journalist -- with their excessive approach, but business is booming due in part to the fact that store managers are allowed to customise their offering, dictating the look of the stores and the stock to appeal to the target consumer.

And it is not just tourists spending more. From this month the six largest employers in Japan have vowed to increase wages, and according to analyst firm CLSA, there has been a 3.82% pay increase for 30-year-olds and an average increase of 2.6% for 35-year-old workers.

"Those on the poorer end of the employment spectrum could see wages increase by up to 20%," predicted fund manager Chris Taylor of Neptune Investment Management. "Companies are paying staff higher salaries and bonuses and swapping temporary workers onto permanent contracts. At least 35% of Toyota's employees have been temporary workers; now they will be paying for their health insurance and pensions."

Increased wages mean more yen in the pocket of the Japanese consumer, and thanks to changing employment trends such as longer working hours and back-to-work mothers, big superstores are out of luck and convenience stores are in favour. Convenience stores such as 7-Eleven, owned by the Japanese retail conglomerate Seven & i Holdings.

Demographics favourable to the healthcare sector

Just like other developed markets, Japanese people are choosing to become parents later, if at all, and having fewer children. While the birth rate may be not that dissimilar to that of many Western countries, Japan's problem lies in its objections to immigration. A regular flow of immigrants props up European and North American populations while Japan remains resolutely anti-immigration.

While this stance creates certain economic imbalances and threatens to overburden the state, certain businesses are rubbing their hands together with glee.

Twenty five per cent of the Japanese population -- 32 million individuals -- is aged over 65. The number of people over 70 years old is equal to the entire population of Australia. This ratio is only going to get worse as fewer people are born and life expectancy improves.

William Hall, President of research company Ipsos Healthcare Japan, says that Japanese Prime Minister Shinzo Abe has recognised this problem and the opportunity it presents to the health care sector. He cites the 2013 government pledge of investment in regenerative medicines and the move to eradicate the so-called "drug lag," meaning pharmaceuticals now get approved at the same rate as in the United States.

Hall's Forum for Innovative Regenerative Medicine (FIRM) boasts more than 65 members from across industries looking to benefit from the commercialisation of regenerative medicine, including companies like Panasonic, Fujifilm, Mitsubishi Chemical Holdings, Novartis Pharma and Ernst & Young.

Increasing land values

Land prices in Japan fell by two thirds during the last recession, but they are now rising rapidly. However, first-time buyers won't be priced out of the property market. Government initiatives have made it possible to get a 35-year mortgage at 1.5%; with additional subsidies this rate decreases to just 0.6% for the first decade. Also, those buying newly built homes don't need a deposit; it's certainly a buyer's market.

This is a great boon to residential property companies such as PanaHome. However, it is worth remembering that in Tokyo the average first-time buyer's apartment is just 25 square metres, or 270 square feet.

Space is indeed an issue when it comes to city living, especially in Tokyo. If homebuyers want space, suburbia beckons. But for growing companies that want to stay in the business district there only one option, and that is to build up. Mitsubishi Estate owns a considerable chunk of properties in Marunouchi, an upscale commercial district in Tokyo.

Land that used to make up part of the Imperial gardens was bought from the Emperor 150 years ago and now boasts 200-odd skyscrapers, 13 railway lines, seven subway stations, an underground pedestrian system and a free shuttle bus.

The company is 10 years into a vast redevelopment plan that sees floor space go up 1.5 times each time a plot is rebuilt, and unit prices -- and revenues -- go up with it. Once it completes a building, it is usually time to start all over again, leveraging each project with land prices and already secured rental income.

Increasing land values do not only benefit homeowners and property companies. The corporate lending culture in Japan relies on leveraging a real asset, so as land prices rise, companies can re-leverage and invest in their own development.

"There is not a single area in Japan where land prices are falling," says Taylor. "This will help boost consumer confidence, which is essential to the sustained recovery of Japan. Those aged under 45 don't remember the good-old-days, they only know a deflationary environment. Rising land prices and a weak yen will give companies the cash to pay better wages and give Japanese workers the confidence that Abenomics is working."

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Emma Wall  Emma Wall is former senior editor for

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