Our analysis suggests that the Japanese economy is dependent on external sources for growth, a view ...
Our analysis suggests that the Japanese economy is dependent on external sources for growth, a view most investors have been pursuing through their positions in beneficiaries of the global cycle.
The rally in shipping, machinery and technology-related issues reveals the difference between global growth optimism and the resignation that the market shows towards prospects for the domestic economy.
The market suggestion is that Japan is currently barely anything more than a global cyclical play with some restructuring domestic companies performing better than their peers.
Competition from Asia and elsewhere is getting tougher all the time, so we feel companies need to move beyond competition on price, and focus on creating barriers and sustainable advantages. Investors have to focus on what makes Japanese firms competitive and which segments of the economy can be relatively immune to this external pressure.
If competitiveness is simply a function of price, it is difficult to foresee a future for many Japanese firms. But if there are alternative drivers we can feel more confident that these firms have relatively sustainable competitive advantages.
The last week has revealed another camp of companies redefining their core skills. The integrated electrical companies through their merger activity are indicating a distinct shift towards design skills and intellectual property creation and away from manufacturing. We regard this as a tacit recognition that manufacturing is moving away from Japan and that its unique offering is becoming the soft skills of software, design and branding.
Perhaps the most insulated segment from competition is services, where the economy has not developed as far as one would expect, given Japan's wealth. In the past year, the market has seen the listing of a number of service companies, which captures the shift from physical asset based to human capital intensive.
Recent IPO companies such as Yamada Synthetic Services (property services), Kennedy Wilson (property services) and Intelligent Wave (financial software and networks), are typified by the fact that at the end of each day their assets leave.
The same could not be said of the plethora of manufacturing and asset-based companies that typify Japanese industry.
These new companies represent the future of Japan, focused as they are on delivering services, creating intangible assets and barriers to entry, rather than the brute force production efficiencies and commoditised price competition too often applied by Japan Inc.
In contrast, old Japan offers little scope and can be thought of as being in cyclical contraction with short periods, like now, of respite from their general decline. As in Britain, the harsh realities of insufficient profitability eventually catch up and industries like steel, construction, petrochemicals, City Banks and Shipbuilding seem set to be massively restructured before investments in them become compelling on a long term fundamental basis.
Strong new companies in Japan
Companies redefining core skills
Firms are developing sustainable competitive.
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