After many so-called ‘false dawns’, Japan has attracted significant attention this year as investors consider whether now is finally Japan’s time.
The market is undergoing something of a governance revolution following recent reforms from the Tokyo Stock Exchange, including the ‘comply or explain’ rule, which prompts companies to take action if they are trading below a price-to-book ratio of one.
However, the Japanese market is also directly benefiting from the relocation of global supply chains arising as a result of geopolitical tensions.
Explaining this trend in a recent Pictet Future Opportunities report, economist Stéphane Garelli says: “We are in a global world that is fractured and operating in a different way. The fundamental question is how the open world – the US, Europe, Japan, south-east Asia – and the fractured world can speak and trade with each other.
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“If you think of globalisation as a book, we’re in a new chapter. The golden age came between 1978 and 2018, when the world was open and cost efficient. If this were a book chapter, you could title it, ‘Just in time’.
“The consequence of that open world has been that this era witnessed the emergence of extreme specialisation everywhere, exemplified by a heavy reliance on China for manufacturing, the US for advanced technologies, Europe for consumer goods and Opec for energy.
“The problem with specialisation is that it has generated vulnerability, and now suddenly people have realised we cannot be so dependent on one or two suppliers. We are in a transition period in which the name of the game is the decoupling of economies and the application of technologies.”
‘Silicon Island’
This relocation away from economies vulnerable to geopolitical tensions presents an opportunity for Japan. Recent tensions between China and the west, together with Russia’s invasion of Ukraine, have driven countries to reassess their supply chains and the risk of disruption geopolitics brings, especially in the semiconductor industry, where Japan already has considerable expertise.
Taiwan Semiconductor Company (TSMC), one of the world’s leading semiconductor manufacturers, recently pushed back plans to build a US plant in Arizona until 2025, citing a shortage of skilled workers as one of the main issues.
One of Japan’s advantages in this area is its existing semiconductor capabilities, meaning there are no such labour skill shortages. TSMC is currently constructing a plant in Kyushu as it looks to reshore its own production base by opening overseas plants amid tensions with China.
To read the rest of this article visit the October edition of Portfolio Adviser Magazine
