Investors may want to keep resilient Japan on their radar

IN THE rush to capitalise Asia's rapid growth opportunities, investors have often neglected Japan, the world's third largest economy. Japanese companies are not only beneficiaries of Asia's growth but are plugged in to key structural themes of the post-pandemic world - Asia's rising middle class, automation and robotics, and sustainability - yet they remain mostly ignored by investors.

Japanese companies are used to dealing with a challenging domestic economic backdrop. While Japan's economy has improved with a strong bounce of 7.6 per cent in Q2 2021, Japanese businesses have had to fight through a deflationary environment for decades.

As a result, Japan's corporations are generally cautiously run with strong balance sheets and prudent management. This made them resilient in 2020 and meant that the Japanese market thrived amid widespread volatility, rising 16 per cent over the course of last year when the pandemic was at its peak.

JAPAN'S ECONOMY STILL GROWING

According to HSBC estimates, Japan's economy is likely to expand at a pace of around 2.5 per cent and 1.8 per cent in 2021 and 2022 respectively, which is significantly lower than other developed economies. Japan's real economy was up 7.6 per cent year on year in Q2 2021, but this was largely due to a low base from last year and the level of output was below the pre-pandemic level.

The good news is that domestic demand rebounded in Q2 2021, led by the private sector's investment and consumption, while exports remained buoyant.

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The strongest part of Japan's economy has been the manufacturing sector, with nearly all indicators pointing to resilient growth ahead. The export sector has been robust as global demand for Japan's machinery remains strong.

OLYMPICS TO DELIVER SHORT-TERM

BOOST TO ECONOMY

The Olympics will likely deliver a boost to the economy. While the economic boost may not be as large as most expected, this could still support consumer confidence, which is key for any rebound in the second half of 2021.The silver lining is that vaccination rates picked up ahead of the Olympics, and is expected to accelerate in the months ahead. At the current pace, the government plans to complete inoculation towards the end of the year. However, the short-term outlook will depend heavily on how the Covid-19 situation pans out.

TOURISM A KEY GROWTH DRIVER

WHEN JAPAN REOPENS

When Japan reopens its borders to tourists, there will be a surge in pent-up demand for travel to the country, as it is a top travel destination for many Asians. Supported by Asia's rising middle class, tourist spending will be a key pillar for Japan's economic recovery, and will boost overall consumption. With pent-up demand globally, it is conceivable for "revenge" travel to benefit Japan significantly.

Looking ahead, Japan has a target for 60 million tourists by 2030 as several major events are set to take place in the country. Following the Olympics, Japan is expected to host the Osaka-Kansai World Expo in 2025.

LOOK FOR STRUCTURAL THEMES

For the shorter term, while the global recovery remains intact, sectors in Japan such as technology, vehicles, and manufacturing are already seeing improving demand. Japanese exports have rebounded and we see growing earnings across a range of cyclical sectors.

For the long term, the depth of Japan's market provides a good source of global portfolio diversification. Japanese companies have been a hallmark for quality, proving proficient at using technology to improve quality at lower cost.

Robotics and automation: This is especially the case as Japan has been at the forefront on robotics and automation technology which is the foundation for industry 4.0 adoption across the world. The pandemic has accelerated the trend towards automation, and Japanese companies hold a disproportionate global share of both robotics and automation: it's the world's largest producer of traditional industrial robots with a 55 per cent share and four of the world's six biggest manufacturers.

Green revolution: Japan is also well placed to benefit from the green revolution. Last October, Japan pledged to reach net-zero carbon emissions by 2050. This ambitious target would require more green investments to be revved up. With the electrification of transport, Japan carmakers and electric car component makers could benefit from this trend. Furthermore, Japan has been one of the leading makers of energy-saving chips, which can be installed in smart buildings and homes to reduce carbon dioxide emissions of household electronics.

The writer is chief investment officer, South-east Asia, private banking and

wealth management at HSBC.

The strongest part of Japan's economy has been the manufacturing sector, with nearly all indicators pointing to resilient growth ahead. The export sector

has been robust as global demand for Japan's machinery remains strong.