How to play Japan’s demographic decline

Japan’s population is on course to shrink by one-third by 2065, according to Japan’s health ministry. The country’s population is currently just under 130 million people. That’s expected to drop to just under a 100 million by 2053, before falling to around 88 million in 2065.

‘This sets the stage where investors question whether or not to invest in Japan,’ says Gregory Perdon, joint-CIO of Arbuthnot Latham and lead analyst for Japan thematic research. ‘There is a conundrum. Why justify allocation in an economy with declining demographics?’

Perdon, however, isn’t so bearish and believes that Japan’s economic future is still bright. Japan’s government is taking active measures to deal with its ageing and declining population – and this gives investors many specific investment opportunities.

Eight to one ratio

When he was in Japan, Perdon was told by one Japanese official about the so-called ‘eight-to-one’ ratio. That is, for every dead Japanese, the government just needs to increase tourism by eight people per year. 

This will require a major drive in tourism. While Japan is set to host the rugby world cup in 2019 and the Olympics in 2020, the country is really looking to ‘structurally change the environment for tourism,’ says Perdon. 

While the Olympics is important for Japan, says Perdon, ‘it feels almost optical’. ‘The reality is, the Japanese government is seeking to structurally change tourism on a yearly basis.’

Over the past few years, Japan has eased visa restrictions on tourists, particularly to encourage visitors from growing Asian economies. Broadly, this seems to have been working – tourist figures have steadily risen. In 2017, Japan attracted a record number of tourists, some 28.69 million. This was up 19.3 percent from the previous year, as well as being the sixth consecutive yearly increase.

Assuming the Japanese government is successful, areas that are likely do well include hotels that are funded through private equity and property development, argues Perdon. 

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The tourism boom has resulted in a surge for Japan’s hotel businesses. In 2015, the country recorded the second-highest number of hotel transactions on record. And businesses are responding to this. The hotel investment market is one of the most active in the Asia Pacific region. Japan has seen several large new hotel development projects, funded by institutional investors, including a $400 million joint venture between UBS and Mitsubishi. 

Of course, for retail investors in the UK, he notes, exposure to private equity and commercial property in Japan will be hard to come by. Perdon suggests looking into Japanese financials. ‘Banks, because of their loan books, have exposure to property market,’ he notes. ‘Often banks are a levered way of gaining exposure to property market.’

Japanese financials being a good bet also ties in with the potential success of Abenomics. The economic programme is intended to lift Japan out of its deflationary spiral. ‘If there truly a turning point in inflation, commercial property will do very well,’ says Perdon. 

One route to gain exposure to Japanese financials is through active managers. Currently, M&G Japan Smaller Companies, is heavily weighted to financials, which account for nearly a quarter of its total holdings. 

Another play on Japan’s tourism boom is to look at firms that should benefit from increased tourism numbers. Retail is one example. For instance, the fax-free shopping company Don Quijote is especially popular among Chinese visitors. And, as Perdon notes, ‘much of the inward tourism is very dependent on Chinese making an active decision to visit Japan.’

However, it is important to note that consumer discretionary is much more volatile. ‘There can be a lot of noise in these markets. It tends to have a more micro connotation,’ says Perdon. 

Another example of a Japanese firm set to benefit from inward tourism is Resorttrust, a provider of member and non-membership resorts as well as healthcare facilities. The company is increasingly looking to expand through attracting tourists.  

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