«Many investors are unfamiliar with a country in which a stealth equity rally is taking place»
Mr. Kimber, you have been involved in Japanese equities since 1986 and you just returned from another visit to Tokyo. What keeps you interested?
It was the most significant decade of change in Japan from 2012 to 2022 since 1945, especially for the corporate landscape and in particular the corporate and shareholder returns. This is a secular ongoing investment story, including restructuring, industry consolidation, shareholder activism and the arrival of foreign PE companies. The great hidden value release to shareholders is finally happening.
Why has Japan become more important to investors in recent months?
Several external and internal forces are pulling Japan into the right direction. Valuations are already attractive. Firstly, for the first time in three decades numerous Japanese companies agree with the likely secular wage growth argument. Secondly, Japan’s industry is focusing on reshoring and shifting away from China. Thirdly, Japan scheduled the restart of nuclear power plants during 2023. Fourthly, the rising interest rates are resulting in Yen appreciation. Finally, the Japanese economy has reopened to foreign tourism, which was a 20 bn US Dollars industry in 2019.
Can you explain the wage growth argument?
Secular wage growth leads to different and broader demographic consumption patterns. Numerous Japanese company managements agree with the likely secular wage growth argument for both recruitment and retention reasons. Unions are pressing for 5 to 6 percent increases in the «Spring 2023 Shunto» wage round. This will apply to larger companies as they are employers of tomorrow. Our company visits revealed cases of 10 to 15 percent graduate salary increases for spring 2023. Uniqlo and Toyota have announced a major increase in graduate salaries which appeared as front-page news in the Nikkei newspaper. Base salaries at many large corporates rose 3 to 4 percent in 2022 with similar or larger increases planned for 2023. Performance based pay and bonus levels are seeing substantial change. One of our portfolio companies has almost doubled sales bonuses. Additionally, mid-career mobility at all-time high.
Why is Japan reshoring?
There is no doubt that higher cost pressures, Covid-related supply chain disruptions and the US-China trade disputes are all contributory factors behind the decisions to reduce manufacturing footprint in China unless required for local domestic sales. Aside from reshoring many large Japanese manufacturers looking to expand their US footprint. Reshoring provides economic stimulus through higher capex and the labour market.
Can you comment on the change in Japan foreign policy?
Japan is expected to enhance military spending from 210 bn US Dollars to 360 bn US Dollars over next five years. This is in response to both Ukraine and ongoing concerns over Taiwan. Additionally, it is Japan’s intention to maintain strong US relations and support US Asian foreign policy. This enhanced spending is more widely accepted in Japan.
Link to disclaimer
Rupert Kimber is a partner of Quaero Capital LLP. He joined the firm in 2009 and is lead manager of the Quaero Capital Funds (Lux) - Taiko Japan and other Japanese mandates. He is a significant shareholder in the fund and in Quaero Capital LLP. He commenced his career at Cazenove in 1984 and has been involved in Japanese equities since 1986. In 1989 he relocated to Cazenove’s Tokyo office where he worked as an analyst and salesman. In 1997 he became a partner of Cazenove based in Tokyo with the responsibility for developing the Japanese cash equities business as well as remaining active in sales. Following a decision to close the business in 2003, he took the bulk of the team to KBC Financial in Tokyo where he became a managing director with responsibility for developing the Japanese cash equity business. In 2005 he joined Polar Capital to work alongside the Japanese fund managers and was responsible for building out the Tokyo based research team. In 2007, he joined Belvedere Investment Partners where he launched and managed the Belvedere Japan Fund. Rupert Kimber graduated from York University with a degree in politics.