All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
Japan’s demographic challenges are well rehearsed. The National Institute of Population and Social Security Research, a government think tank, projects that Japan’s population will fall from its 2008 peak of 128 million to 88 million by 2065, with senior citizens making up over a third of the population. Japan must act decisively to disarm this ticking demographic time bomb.
Hollywood stars such as Al Pacino, De Niro and Pesci are not the only ones turning back time to prolong their careers. Companies are also dabbling with de-ageing by employing admittedly less glitzy enterprise software solutions. This is a trend that has accelerated recently, as companies were forced to rethink working practices in light of the pandemic.
These tools offer Japan Inc not only a temporary cure to the corporate fall-out from coronavirus, but a countermeasure to the chronic issue of dwindling demographics. This is de-ageing in the business sense and is an increasingly important theme running through our specialist Japan funds, in particular in the small-cap area.
Japan is a place of peculiar paradoxes: although home to global powerhouses in robotics, automation and precision engineering, its inhabitants appear deferential to neo-luddite-like desires. There appears to be an anachronistic affinity for paper and the humble fax machine. Cash remains king and printing is pervasive! Although arguably inefficient, these practises do provide a significant amount of employment: about 20 per cent of Japan’s workforce comprises office assistants and clerks, roughly double the equivalent of the US and UK.
History is at least part of the explanation. Japan’s two-century-long self-imposed period of isolation from the mid-1600s to the mid-1800s thoroughly stifled the flow of new ideas and resources. Entrenched ways were bred out of isolation. Japan’s job-for-life economy is another explanation. Building up a cryptic filing system is much easier in paper form. If only you can understand something, then you have some bargaining power and a decent riposte should human resource heavies swing by unannounced.
There is nothing wrong with a paper-based economy per se. Having jobs for people to do seems like a desirable thing, although, of course, there are trade-offs. It is productivity that really matters though it is often overlooked – everyone could be employed to do nothing and paid handsomely for it in bits of paper.
In Japan such a debate is less philosophical. The country is running out of working-age people. Its trend unemployment rate is too low, not too high. How can time and resources be freed up? We like businesses that are intent on addressing this all-important question.
The hanko stamp is a decades-long piece of Japanese administrative tradition. Documents are authenticated with a hand-pressed stamp or seal instead of a signature. Japan’s unique fusion of old and new is part of its charm. But charm is no safeguard against the unexpected. The recent pandemic is an unfortunate case in point. People, paper, and time-intensive processes suddenly became all-the-more burdensome when offices went into lockdown. Some whisper that Japan’s corporate handbook needs to be updated, others shout.
Bengo4, an online legal platform and one of our portfolio holdings, is firmly in the shouting camp. Its CloudSign service enables contracts to be digitally signed and stored. Time is saved, costs are reduced, and compliance is strengthened. Its customer book has roughly doubled over the last year as organisations reassess the costs and benefits of manual processes. This reassessment is no doubt quickened by Covid-19, but was already in the works. For CloudSign, the competition is paper and the opportunity open-ended.
CloudSign is an offshoot of Bengo4’s core business: bringing information and transparency to people seeking legal advice, historically an underserved area in Japan. One common trait we look for in businesses is an ability and willingness to add spokes over time. Bengo4 typifies this with its habitual willingness to take risks and to experiment without any fear of failure.
Japan Inc underinvests in information technology (IT) and is one flipside of high corporate cash balances. For managers with limited resources, IT is often shelved for next time. Gauging the return on IT investment is difficult. Typically, upgrades yield incremental and diffuse benefits. Over time, such benefits compound but this doesn’t fit neatly into an Excel spreadsheet. Underinvestment in IT is by no means unique to Japan, but given Japanese demographics the implications for the country are likely more profound.
IT can be an enabler for business agility. When done right it breeds flexibility and sharpens the flow of information, a profit driver rather than a cost centre. That said, there are many hazards to navigate when it comes to IT procurement. One is the disconnect between buyers, sellers, users and developers, which stretches out project lead times and inhibits feedback loops. This disconnect is exacerbated by the fact that the majority of IT staff in Japan work for pure-play IT firms. In the US, the reverse is true, with IT know-how spread more evenly through the economy at large.
Cybozu, an enterprise software business and another portfolio holding, is attempting to change the rules of the game. Its flagship product, Kintone, is a do-it-yourself enterprise software platform. The user becomes the developer. Its intuitive and code-free interface means data-management applications can be built in a matter of days and easily tweaked as needs change. This is a new flavour of software development – cheaper, quicker, and more accessible.
Having a great product is rarely enough. The challenge becomes to convince others of its merits and to relentlessly strive for improvement, both incremental and wholesale. This gets at the mindset of a business. What are its priorities? What does it stand for? These questions are not new, just difficult. Over the long run, they are what matter in defining possibilities and probabilities.
In many ways, Cybozu is the antithesis of stuffy corporate Japan. Its employees are actively encouraged to set their own hours to suit other commitments. Working from home is favoured, a body-blow to Japan’s chronic presenteeism. Generous childcare leave is afforded to new parents, unheard of in Japan and particularly important for keeping females in the workforce, not to mention retaining knowledge and skills over the course. Cybozu thinks carefully about its social purpose. It does things its own way.
A lack of forward-thinking investment in processes and systems ultimately hurts the customer. The real estate industry in Japan is one example among many where too many businesses treat the customer experience as an afterthought. GA Technologies, a real estate-focused technology business and portfolio holding, is working on multiple solutions to declutter and standardise the interactions between various parties in this industry.
The mortgage application process is one area that GA Technologies is targeting. Mortgage seekers in Japan face a torrent of forms and time-consuming in-branch meetings. GA Technologies’ Renosy platform is recalibrating the state of play. It allows loan applications and sale agreements to be handled digitally. Lenders can plug into datasets stored on Renosy on behalf of applicants, who are spared from having to fill in details multiple times. With less paper and fewer people involved, review times are shorter and the whole buying process is more streamlined. The customer is front and centre, while lenders and estate agents benefit from having access to the curated data they need in one place.
GA Technologies’ clever technology serves two purposes. First, it supports its own customer-facing services and helps to build lasting goodwill. Second, its software modules can be packaged up and sold on to other third-party businesses. This makes the opportunity even more compelling as a technology supplier to a sizeable and people-intensive industry that is ripe for change.
Data can be both an asset and a liability. Too much data can be overwhelming and impinge on decision making. Mishandled data can be crippling for the reputation and inner workings of a business. But data can also be an asset and a source of competitive advantage. Insight can be gleaned, and new opportunities unearthed. There are often more subtle benefits as well.
Infomart, an online ordering platform and a portfolio holding, connects buyers and sellers in the food industry. Restaurants can search for suppliers, place orders, and receive invoices. Infomart’s platform replaces transactions taking place over the phone, via fax or in person. Complex ordering processes become much more straightforward and less error prone. The industry as a whole becomes much less wedded to stale legacy relationships with information more transparent and accessible.
Infomart has a unique feed into its customers’ business. It sees who is ordering what from whom and for how much. It sees who is paying on time and who is not. This is valuable information that Infomart can harness to further bolster its range of services. It has teamed up with GMO Payment Gateway, a payment services business and portfolio holding, to offer a one-click payment option for outstanding invoices. Balances are settled by GMO Payment Gateway which in turn assumes the to-be-paid invoice. Infomart customers benefit from the cash-flow flexibility this provides to both buyers and sellers.
Infomart has a knack of coming up with new ideas. We don’t pretend to know what might come next, only that the opportunity set for Infomart is bounded by nothing but its own ambition. The food industry is merely its first port of call, as it grows and matures in line with the country’s changing profile.
Japan, like all countries, faces well-documented challenges. Its demographics are not in its favour. Its chronic underinvestment in IT means inefficiencies are rife. But with problems come solutions. And over time comes change. We are increasingly enthused by the number of, often founder-led, businesses in Japan deploying technology to make other businesses work better. Just as Hollywood’s finest are coming to realise that with the right tools they can be youthful once again, so too is Japan Inc.
The views expressed in this article are those of Jared Anderson and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in November 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ("FinIA"). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Room 3009-3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission. Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this document represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
49763 PRO WE 0171
Jared joined Baillie Gifford in 2016 and is an Investment Manager in the Japanese Equities Team. Previously, he worked for two years as an Assistant Economist at the Scottish Government. Jared graduated MA (Hons) in Economics from the University of Edinburgh in 2012.