Letter From Tokyo View From Above A taxing issue for consumers
Letter From Tokyo
Shigeru Oshita, Chief Portfolio
Manager, Japanese Equities
A taxing issue
VIEW FROM ABOVE
Left out in
– a catalyst for change?
View From Above
A taxing issue for consumers
In the last edition of Letter From Tokyo, I talked about the increase in consumption tax, which increased in April
from 5% to 8%. At that time, I was relatively relaxed about its likely impact, largely because of the fundamental
strength of the Japanese economy. With the tax increase now six months old, it is worth looking at its actual impact
on Japanese consumers.
While the impact on overall consumption has been modest, consumption trends appear polarised between cheaper
daily consumables and more expensive, higher-end products. Retailers are passing on the tax increase and in
an environment where real wages are not increasing, consumers on low incomes are adjusting to higher prices
by consuming less. Conversely, those on higher incomes are continuing to make purchases with sales of more
expensive products almost unaffected.
How have retailers responded? Those focused on low value, commodity-type products (e.g. apparel) are struggling
and have responded by cutting prices, although with limited success. Volumes have not increased even at lower price
points and these retailers are likely to reduce prices further across a wider range of products. Again, polarisation
is apparent across different product categories. A major Japanese television retailer reports that while sales of TVs
below $500 have fallen, sales for big-ticket products, such as 50-inch TVs, remain strong.
My conclusion is that Japanese consumers are clearly differentiating between products. They are purchasing, or prepared
to pay more for, quality products that offer clear value while being more discriminating towards general products.
"Consumption trends appear polarised"
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Left out in the cold
The launch of the new JPX-Nikkei 400 Index has been seen as a strong
incentive for Japanese companies to become more focused on capital
efficiency and improve their corporate governance. Companies gain
entry into this index based on quantitative criteria such as return on
equity (RoE) and by committing to meet the principles of a governance
code. It is seen as a corporate ‘badge of honour’ to be included.
"This index is
proving to be
a catalyst for
The issue of companies seeking to meet the criteria for index inclusion
is actually indicative of a wider change I have detected from Japanese
companies in general. There is now a far greater awareness of the
importance of shareholder value, and a focus on RoE becoming a key
Two companies that illustrate this trend are machinery company Amada
food processing firm NH Foods. In the case of Amada, it has committed
to increasing its payout ratio to 100% (50% dividends, 50% share
buybacks). NH Foods has responded through a share buyback funded
by issuing convertible bonds. Both companies have been rewarded by
investors for their greater awareness of shareholder value.
Vehicle emissions – a catalyst for change?
Regulations governing vehicle emissions are tightening across the
globe, presenting clear opportunities for particular companies. With
continual increases in emission standards comes the requirement for
auto manufacturers to upgrade components and technology. I have
come across several Japanese parts manufacturers I believe are well
placed to exploit this continual change.
The winners in this process will be those companies who adapt and
respond, manufacturing high quality components able to command
and maintain high margins. Japanese filter and sensor suppliers NGK
Insulators and NGK Spark Plug are examples of companies that are rising
to this challenge successfully. Not only are they addressing a growing
demand, but unlike other commoditised auto-part suppliers, their
products require sensitive process controls using ceramic materials
and therefore have high value content. Their dominant market share
provides economies of scale in production with the high value nature
of their products securing high profit margins.
A further reason for my optimism is that the market for auto components
capable of reducing pollution levels is now truly global and has expanded
to cover commercial vehicles, not just cars. Emerging markets such as
China are moving towards European environmental regulation levels for
vehicles sold in their countries. I believe several Japanese companies
are well placed to exploit these global trends.
Building the foundations
Following 20 years of falling construction investment in Japan, I am
now detecting the first signs of recovery. I think the main reason for this
relates to the earthquake and tsunami that hit Japan in March 2011.
This catastrophic event was a wake-up call for many, resulting in major
new projects and the upgrading of Japanese infrastructure. Vulnerable
buildings are being rebuilt or upgraded in order to provide greater
I think the construction sector has also come to life because of
acceptance that something has to be done to relieve Tokyo congestion.
With 60% of traffic around Tokyo unrelated to residents or business,
three new ring roads are being developed to divert traffic and improve
travel times. The average speed on the main ‘express’ highway around
Tokyo currently is barely 40kph.
The improving economic environment in Japan has also led the Abe
government to promote significant new public and private development.
An obvious example is the level of new investment around Tokyo
prompted by the 2020 Tokyo Olympic Games. These new projects are
not simply restricted to Tokyo. Other regions are also benefiting as
investment is made in upgrading airport runways and increasing bullet
train capacity to cope with higher expected visitor numbers.
However, what is apparent is that not all
construction companies will benefit from
increased construction activity. Often these
new construction projects are complex,
requiring specialist construction techniques.
Given the more specialist nature of many of
these new projects, I would expect current
profit margins within the industry to improve.
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