Despite Japan’s aging population and mounting public debt, the country offers a host of investment opportunities, according to Katie Koch, co-head of Goldman Sachs Asset Management’s (GSAM) Fundamental Equity business. Koch recently returned from GSAM’s annual Investor Tour, held this year in Tokyo and Kyoto, where the team hosted 20 CEOs, CIOs and heads of equity from large US institutional investors, along with Japanese policy makers, government officials and C-suite executives.
Katie, why did you elect to go to Japan for this year’s Investor Tour?
Katie Koch: Japan is changing incredibly rapidly, but it continues to be misunderstood and, for the most part, underappreciated by investors. Indeed, Japan is the only major global equity market that has actually had a de-rating in its price-to-earnings multiple since the global financial crisis. This is despite dramatic improvements in corporate governance and the fact there are many companies poised to benefit from strong secular growth trends, such as the strengthening emerging markets consumer, the rise of autonomous and electric vehicles, and the growth of robotics. We wanted to take our clients to Japan to explore the idea that it may be the world’s most underrated equity market and therefore provide tremendous wealth creation potential.
What were clients seeking to learn from the Tour and what were the major takeaways?
KK: Our clients on the Tour, who represent $3.2 trillion in assets, wanted to gain a deeper, first-hand understanding of the changes happening across Japan—from economic policy to corporate culture to shifting social attitudes. We met with executives at leading companies including Softbank, Takeda, Shiseido, Nidec and others.
From our conversations with these companies, it is clear that change, even if slow, is happening everywhere. For one, we’re seeing companies once again focus on investing in innovation. As Takeda’s CEO, Christophe Weber, highlighted: Japan has a long history of innovation, having been at the forefront of many major advancements in the 1970s and 1980s. And, even in recent years, Japan has remained a leader in many areas of R&D, but has suffered from an inability to successfully commercialize such work. Takeda’s decision to partner with Kyoto University’s Shinya Yamanaka, who won the 2012 Nobel Prize for his work in stem cells, is just one example where the private sector is helping to change this dynamic.
Many Japanese companies are also extremely well placed to benefit from the Fourth Industrial Revolution and the pervasive nature of technology. Micro motor and electronic component manufacturers, such as Nidec and Murata Manufacturing, are now critical suppliers to companies across industries like electric and autonomous vehicles, robotics and automation, the Internet of Things and 5G. So, while they may not be the first companies investors would think of when they consider these secular themes, they are among the best placed to benefit globally.
What are some of the macroeconomic headwinds Japan is facing?
KK: Japan has the highest level of debt-to-GDP ratio of any developed country. The country is struggling to generate inflation and its population is estimated to fall to 100 million by 2050 from 127 million today. But there are positive changes on the horizon. Women are entering the workforce in greater numbers—a topic on which my colleague, Kathy Matsui of Goldman Sachs Research, has written extensively about in her “Womenomics” research. And while immigration is still a politically sensitive issue, the government is issuing more temporary three-year visas and student visas, signaling an increasing openness.
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