There are two major transformations taking place in Japan that are creating investment opportunities for the long-term investor, according to JP Morgan’s Eiji Saito: decarbonisation and digitalisation.
Japan is aiming to become carbon neutral by 2050 and Saito, who runs the JPMorgan Japan Small Cap Growth & Income trust, said many of its companies are producing the technology that will play a vital role in helping it achieve this target.
These include products that can help improve efficiency and reduce carbon emissions, parts used in electric vehicles, and solar energy panels.
But while the theme of decarbonisation is larger and encompasses more areas than most people realise, there isn’t a single industry in Japan that isn’t capable of being transformed by digitalisation – assuming it hasn’t been already.
To keep things simple, Saito has broken down Japan’s digitalisation into four key areas that he is hoping to tap into in his trust.
E-commerce
Like most other countries, the coronavirus pandemic boosted take-up of e-commerce in Japan last year. Saito owns two stocks that help other companies to tap into this theme.
“BASE allows anyone to easily and quickly set up an online store in just a few hours, with no setup charge or recurring monthly fee,” he said.
“While major e-commerce platform providers such as Amazon and Rufden have a high market share, BASE is growing rapidly as its service enables small store operators and individuals to make their own e-commerce shop and sell their own products and services online.
“We also invest in a company called Yappli, which provides a no-code mobile app development platform. Usually, you need to hire software engineers if you want to develop your own mobile app. However, using Yappli, retailers can start their own mobile app e-commerce business without these. It provides an effective interface with services such as coupons, push notifications, points cards and GPS store navigation.”
However, Saito pointed out that starting an e-commerce business is just the first step, and if you want your business to make any money, you need customers. This is where another one of his holdings comes in: PLAID.
“PLAID offers a customer-experience software platform,” the manager said. “Using PLAID’s services, retailers can analyse and visualise each client who visits their online stores, find out what they are truly looking for and provide products that match each one.”
Cloud infrastructure
The development of cloud infrastructure has allowed the digitalisation and streamlining of many business operations. The best example of this is hanko, a seal/personal stamp used in Japan instead of a signature. While this has been in use for the past 1,000 years, Saito described it as the cause of one of Japan’s biggest bottlenecks in terms of labour productivity.
“As long as we need hanko in contracts, someone has to go to the office to fill in a paper document,” he said.
“Now more and more Japanese companies are changing their old-fashioned business operations by using new cloud software services such as Cloudsign [from Bengo4.com].”
A second cloud infrastructure company called Money Forward provides a cloud-based accounting software for tasks such as settlements, pay load calculation, expense management and attendance management. A third, HENNGE, offers an identity and access management service to centralise authentication into various internet and software applications.
“Let's imagine that we use a cloud-based digital contract service provided by Bengo4.com and we also use cloud-based accounting software provided by Money Forward,” Saito continued.
“If we use 20 cloud-based software services, we need 20 identities and passwords. An access management service solves this inconvenience by providing a single sign-on system that allows access to all cloud services through one ID and password.”
Medicine
The third main area of digitalisation is taking place in the medical sector. Portfolio holding Medley is Japan’s largest telemedicine platform, which has been well received amid Covid-19, with increasing take-up among patients and medical clinics.
Another company called AS ONE is an e-commerce platform that specialises in scientific instruments and hospital products.
“Japan’s public sector, including the medical sector, is very conservative in nature,” Saito explained. “But digitalisation and e-commerce penetration has been accelerating amid Covid-19.”
Digitalisation of industries
While the final theme sounds broad and unspecific, Saito said many industries in Japan are still clinging on to old-fashioned business practices, which is presenting opportunities for competitors who are willing to embrace change.
One company facilitating this theme is Infomart, which is driving the modernisation of the restaurant industry.
“Transactions within the food industry have been highly inefficient and many Japanese restaurants use paper documents and faxes when ordering ingredients,” Saito continued.
“Infomart is the number-one player in providing an e-commerce platform for the food industry. It is becoming the de facto standard for food wholesalers and restaurant operators.”
The manager said that Raksul is performing a similar role in the logistics industry.
“Raksul provides a truck-sharing online platform which allows you to quickly and easily book a package delivery service from your PC or smartphone.
“Productivity is very low in the logistics industry, just like the food industry. But many Japanese smaller companies are focusing more on digital transformation in these old-fashioned industries to improve this.”
Data from FE Analytics shows JPMorgan Japan Small Cap Growth & Income has made 82.13 per cent since Saito joined in November 2016, compared with 71.31 per cent from the IT Japanese Smaller Companies sector.
Performance of trust vs sector and index under manager
Source: FE Analytics
The trust is on a discount of 8.71 per cent compared with 9.06 and 9.9 per cent from its one- and three-year averages.
It is yielding 4.05 per cent and has ongoing charges of 1.14 per cent.