Resilience to the rescue: How Japan’s economy weathered Covid

September 2021

Key points

The indomitable spirit of the Japanese and companies such as Fanuc and Nidec enabled the economy to endure another natural disaster, increase capital expenditure and sustain dividends.

A year later than originally planned the four-month Olympic torch relay started in Fukushima prefecture on 25 March with the slogan ‘Hope Lights Our Way’. © CHARLY TRIBALLEAU/AFP/Getty Images.

The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.

The Japanese phrase nana korobi, ya oki: ‘fall down seven times, get up eight’ speaks volumes for the resilience of a nation that’s endured more than its fair share of tragedy and hardship.

March 11, 2021 marked a decade since the Great East Japan Earthquake, which left 22,000 people dead or missing, destroyed 122,000 homes and triggered a tsunami and a nuclear catastrophe at Fukushima.

Two months later the shinkansen (bullet train) line from Tokyo to Tohoku, largely destroyed by the tsunami, was back up and running. Embodying the spirit of nana korobi, ya oki factories were rebuilt, disaster recovery protocols enhanced, and companies took the opportunity to diversify and localise production to reduce future risks.

Fast forward to the 2020–21 global pandemic and the Japanese have coped in a similar spirit. Although lockdowns and social distancing have been less draconian than in the US or Europe, most people have followed guidance diligently and taken steps to contain the virus. The result has been fewer Covid-related deaths, while the economy has held up better.

Conversations with companies painted a picture of a stoic and self-possessed nation unfazed by the adversity ahead. Covid-19 for many companies is ‘just another crisis’.

But there are other dimensions to Japan’s resilience. First, a process of deleveraging and cash accumulation – beginning in earnest after the 1980s bubble burst and gaining momentum following the ‘Lehman shock’ in 2008 – has resulted in a corporate sector with unparalleled financial strength. Japanese companies have been criticised by investors for their inflated balance sheets. However, this war chest has allowed companies to retain employees, maintain investment plans and sustain dividends.

Well over half of non-financial listed Japanese companies benefit from a net cash position with almost 40 per cent boasting cash balances in excess of 20 per cent of net asset value. This explains why business investment fell modestly when the economy contracted sharply in the first half of 2020. Indeed, many of our holdings increased capital expenditure.

Global leader in industrial automation Fanuc continued to expand its line-up of collaborative robots and further develop its internet of things-based platform, despite a sharp fall in profits.

Similarly, leading manufacturer of industrial motors Nidec spent heavily on acquisitions and manufacturing capabilities when profits slumped, enabling it to capitalise on burgeoning demand. Even our holdings in skincare, which suffered when stores closed and tourism collapsed, have continued to increase their footprint in China and their advertising spend.

We expect clients to benefit as future growth prospects are realised.

As previously, dividend payments have been more resilient in Japan. There is a cultural aspect to this, with management teams not wishing to disappoint investors by failing to deliver. No doubt balance sheet strength has also played a part. Among holdings that suffered last year, very few made material cuts to dividend forecasts and, in aggregate, the falls in shareholder pay-outs have been lower in Japan. We can even cite several examples of companies that increased projected dividends while revising down earnings forecasts. This demonstrates both confidence and resilience, as well as improving attitudes towards corporate governance.

Second, although we prefer to focus on companies, the strength of Japan’s financial system is also worth highlighting. Unemployment has remained largely unchanged amid the pandemic, in sharp contrast to other countries. Joblessness is now estimated at around 3 per cent, close to full employment. Japanese banks have continued to expend lending, while the health of their corporate customers has spared them from major impairment charges.

Finally, although the Japanese Government chose to enact major stimulus last year with other developed countries across the world, Japanese households are awash with cash.

According to the Bank of Japan, Japanese households currently sit on cash savings of over $9trn, almost twice the size of Japan’s GDP. Once the world returns to normal, the capacity of Mrs Watanabe to spend and invest will be higher than ever.

It’s significant that the Olympic torch relay set off from Fukushima, a symbol of Japan’s reconstruction from earthquake and tsunami, a prelude to highly successful Olympic Games held during a global pandemic. It was yet another embodiment of nana korobi, ya oki, with the athletes embodying the true spirit of that saying.

Risk Factors

The views expressed in this article are those of Andrew Brown 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 September 2021 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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