Japan

18th Feb by ShoeShineBoy

13 comments 682 reads

Japan has been covered on the Investment Trust discussions initiated by Charles Mitchell and also in a number of posts by Edmund Shing. I hope no one minds me setting up a specific Japan discussion here, I'm hearing so much about Japan, I'm keen to build a mini library and hear views from other subscribers.

I wrote about Japan back in October when JP Morgan presented at the AIC Conference:

Big on Japan - Nicholas Weindling of JP Morgan Japan (JFJ)

JFJ: https://tinyurl.com/3csxxdtw

# I wonder if the powerpoint is available on the JP Morgan site ? I recall it was good in listing out the pros and cons.

# Based in Tokyo. Apparently not all Japanese trust/fund managers are based in the country (SSB: staggering really but there you go). The JP Morgan team is 25 strong.
# NW observation: London is expensive! Nothing specific, just a general observation.
# Japan is just not as expensive as it used to be.
# NW mentioned his favourite Japanese noodle restaurant/takeaway and said the same dish in London was £21.50 compared to £5.50 in Tokyo. SSB: I have heard that software developers in Japan are paid less than Vietnam, bit of generalisation I know but being cheap keeps a country competitive.
# Tourism is re-bounding big time in Japan.
# BoJ has been on a very different course to other central banks over the last 18 months. At some point, the BoJ could (should ?) stop buying bonds. Effect of this will be to reduce the weakness of the JPY currency. Interested to hear other's views on this as I see a weak currency as good for exports and tourism but a massive negative for imports (and Japan is a big importer of oil).
# SSB: worth bearing in mind at this point that the Japanese market went sky high in 1989/90 when the Grand Palace in Tokyo was worth more than all the real estate in California and then crashed. This has had a massive impact on a whole generation of company managers in Japan who have hoarded cash ever since. Impact is that many corporate balance sheets have too much cash and very profitable companies with good margins have poor ROCE numbers because the balance sheets are too heavy.

# Back to NW: EPS the same as the US but just as cheap as 20 years…

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About the Author

ShoeShineBoy

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13 comments

ShoeShineBoy

18th Feb

The first comment in this week's Money Makers podcast mentions the Nikkei, up 4% on the week and up 30% in the last 12 months in local currency terms but only up 18% in Sterling because of the continued weakness of the JPY currency. Is there still value left given the rises over the past year ? Certainly Balance Sheets are in good shape.

Also noticed the following in the IC: http://tinyurl.com/2s4xnb7d

What the Bank of Japan changes mean for investors

Inflation rates in Japan and the UK are no longer a world apart, at 3.2 per cent and 4 per cent, respectively. But monetary policy could hardly be more different.

In the UK, the Bank of England (BoE) stands poised to slash interest rates later this year, having hiked them to a 15-year high of 5.25 per cent. In Japan, the base rate has sat at -0.1 per cent since 2016, and last month rate setters said that “the Bank will patiently continue with monetary easing”. More than two years after the BoE kicked off the developed markets rate-hike cycle, the question of when the Bank of Japan (BoJ) will follow suit remains unanswered.

Japan’s deflationary period may have ended a decade ago, but the threat of too low inflation still looms. Since 2013, inflation has averaged just 0.8 per cent. Although price growth is currently higher than Japan’s 2 per cent target, policymakers are worried that it won’t stay that way. Wage pressures are a particular concern – but not in the way they are in the UK. Japanese policymakers are worried that small and medium-sized businesses will hold off on wage hikes, leaving pay growth unable to stoke inflation.

Unions lead wage negotiations, known as the shunto, each spring. Although the final results won’t be known until later in the summer, rate-setters should be able to get a sense of how momentum is building by March. Analysts at Bank of America think that policymakers will finally pull the trigger on a rate hike in their April meeting, following some crucial business data releases.

But they may not want to wait that long: analysts at Capital Economics point out that inflation is forecast to fall over the course of the year, leaving “only a limited window of opportunity for the Bank to exit negative rates”. They anticipate a first rate hike in the March meeting. In any case, the scale of increases looks set to be modest: forecasts from Capital Economics indicate that rates will peak at 0.1 per cent. That is below consensus expectations, but even so the average forecast stands at just 0.5 per cent.

If these predictions are right, the BoJ will move to hike rates just as the other major central banks start to cut them. In theory, this should see the yen appreciate as rising interest rates increase demand for the currency. Economists at Dutch bank ING think that the yen will strengthen against the dollar this year, with the USD/JPY exchange rate moving from 148 today to 135 by the end of June.

Currency movements will add a layer of complication for some Japanese ETF investors. As the chart below shows, Japanese equities enjoyed a resurgence in 2023 – but currency movements put a decent dent in those returns. A flagging yen was bad news for investors who bought in unhedged dollars (or pounds): as the yen weakened, the investment did too. A stronger yen will also be bad news for some Japanese exporters, whose products will be less competitive on the global stage. Bank of America analysts think that auto and transportation equipment, electric appliances and precision machinery could prove particularly vulnerable. Pharmaceuticals, electric power and gas could fare better as the yen strengthens against the US dollar.

After such a long period of negative interest rates, there are those who think a policy pivot could trigger financial stability concerns. In December, the Bank of England’s Financial Policy Committee warned of the risk that interest rate changes could trigger volatile price adjustments in Japan, which could lead to losses on domestic government bond holdings for some Japanese banks.

Japanese bonds make up only 5 per cent of major UK banks’ holdings, but the committee warns that asset price moves in Japan could spill over to other countries, leading to tightening financial conditions in the UK. TS Lombard economist Konstantinos Venetis thinks that even after the BoJ raises rates, yield curve control (YCC) targeting longer-term interest rates will stay in place. After the last policy meeting, Venetis said that “YCC is here to stay and has a role to play in addressing bouts of volatility in the Japanese government bond market”.

BnB

18th Feb

I refer to my comment on the China thread today. I've been investing in Japan for 5 years and what works is to invest in strong balance sheets of quality firms with high cash generation. Japan PERs are much higher than UK so you'll need to adjust your slide rule. Here's a selection:

Tokyo Electron - semiconductor capital equipment, flying high but still some upside in analysts' views

Murata Manufacturing - electronic components, awaiting demand inflexion

Keyence - the biggest firm you've never heard of (3rd largest in Japan), industrial automation, very high multiple but justified by astonishing operating margin >50%, sector currently in a trough so not as expensive as it looks

Daikin - air conditioning, shares depressed today by Europe/Asia macro, possible good entry for the patient

Hitachi - industrial conglomerate on a strong run, still some upside likely

Shimano - bicycle equipment, in a slump, very strong brand and probably limited downside but patience likely required

Hoya - lenses and optical equipment, secular winner, never cheap, look for a dip

Sony - electronics and entertainment, solid performer

tony akram

18th Feb

I have a small holding in Baillie Gifford Shin Nippon has been a terrible investment of late but sticking with it as too late to bail now.

This IT used to be the go to for Japan however something seems to have happened of late no sure what ?

ShoeShineBoy

18th Feb

Thanks for the responses. My current Japanese holdings are though AVI Global Trust (LON:AGT) which is a value investment trust focusing on family led businesses, private equity trusts and Japan.

Nippon Active Value Fund (LON:NAVF) is the obvious choice to get some Japan exposure as it focuses on what you like BnB, which strong balance sheets where there is still some value to extracted. I'm just wondering if I am too late as it's been a strong performer over the last few years and there i not much discount to be had. http://tinyurl.com/yr3pc4nc

The Baillie Gifford trusts have had a really rough time of things recently. Growth focused, they have suffered from higher interest rates. I like the podcasts available from BG but it feels like they talk up their own book a lot. http://tinyurl.com/2vwzr4fs

On a slightly different note, I noticed Japan slipped into recession last week:

UPDATE 4-Japan unexpectedly slips into recession, Germany now world's third-biggest economy

By Leika Kihara and Tetsushi Kajimoto

TOKYO, Feb 15 - Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world's third-biggest economy to Germany and raising doubts about when the central bank would begin to exit its decade-long ultra-loose monetary policy.

Some analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption and production halts at a unit of Toyota Motor Corp 7203.T all point to a challenging path to an economic recovery. "What's particularly striking is the sluggishness in consumption and capital expenditure that are key pillars of domestic demand," said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute. "The economy will continue to lack momentum for the time being with no key drivers of growth."

Japan's gross domestic product (GDP) fell an annualised 0.4% in the October-December period after a 3.3% slump in the previous quarter, government data showed on Thursday, confounding market forecasts for a 1.4% increase.

Two consecutive quarters of contraction are typically considered the definition of a technical recession.

While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2% target. "Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers at the margin," said Stephan Angrick, senior economist at Moody's Analytics."This makes it harder for the central bank to justify a rate hike, let alone a series of hikes."

Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as "lacking momentum" due to rising prices. "Our understanding is that the BOJ looks comprehensively at various data, including consumption, and risks to the economy in guiding monetary policy," he told a news conference after the data's release, when asked about the impact on BOJ policy.

The yen JPY=EBS was steady following the release of the data and last stood at 150.22 per dollar, pinned near a three-month low hit earlier in the week.

The Nikkei .N225 rose 0.8%, reversing some of its losses made from the previous session, possibly on expectations the BOJ may continue with its massive easing programme for longer than expected.
On a quarterly basis, GDP slid 0.1% against median forecasts of a 0.3% gain, and compared with a 0.8% contraction in the previous quarter.

CONSUMPTION, CAPEX WEAK

Private consumption, which makes up more than half of economic activity, fell 0.2%, weaker than a market forecast for a 0.1% gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes.

Capital expenditure, another key private-sector growth engine, fell 0.1%, compared with forecasts of a 0.3% gain, as supply constraints delayed construction projects.

External demand, or exports minus imports, contributed 0.2 percentage point to GDP as exports rose 2.6% from the previous quarter, the data showed.

The BOJ has been laying the groundwork to end negative rates by April and overhaul other parts of its ultra-loose monetary framework, but is likely to go slow on any subsequent policy tightening amid lingering risks, sources have told Reuters.

While BOJ officials have not offered clues on when exactly they could end negative rates, many market players expect such an action to happen either in March or April. A Reuters poll taken in January showed April as the top choice among economists for the negative rate policy to be abandoned.

Some analysts say Japan's tight labour market and robust corporate spending plans are keeping alive the chance of an early exit from ultra-loose policy.

"While the second consecutive contraction in GDP in Q4 would suggest that Japan's economy is now in recession, business surveys and the labour market tell a different story. Either way, growth is set to remain sluggish this year as the household savings rate has turned negative," said Marcel Thieliant, head of Asia-Pacific at Capital Economics. "The (BOJ) has been arguing that private consumption has 'continued to increase moderately' and we suspect that it will continue to strike an optimistic tone at its upcoming meeting in March," Thieliant said, sticking to his projection the bank will end its negative interest rate policy in April.

ShoeShineBoy

18th Feb

The January Fact Sheet for Nippon Active Value Fund (LON:NAVF). A bit light on commentary but some of the best trusts are like that. They stick to their mandate and the movement is glacial. navf-factsheet-january-2024.pdf (nipponactivevaluefund.com)

Indie

19th Feb

I remember my stockbroker saying that Japan was just about to be the next big thing. That was around 30 years ago. The fund they bought for me subsequently went bust. It has sometimes felt that 'the East' has been going to be the next big thing almost continuously since then.

This time it's different?!

Charles Mitchell

19th Feb

The changes going on with the Stock Exchange, companies now facing corporate activity- to pay more in dividends as well as takeovers will I think change fundamentally the Japanese market. NAVF which I hold is part of this movement.

ShoeShineBoy

19th Feb

Spot on Charles, the Tokyo Stock Exchange is taking the reporting of certain aspects of Japanese companies very seriously eg: what their plans are to deal with excess cash balances etc.

The 10 minute podcast that Edmund Shing of BNP Paribas produced last June is an easy listen and still relevant.

http://tinyurl.com/3rxtdtfc

As per the podcast, key reasons to invest in Japan:

Strong price momentum so something is clearly up.

Fundamentals are good with strong earnings growth + ROE approaching 10%.

Dividend yield >2% + buybacks.

Japan finally has some inflation and therefore people who were in cash for so long are looking for a better return.

Exposure to China re-opening (SSB: this has admittedly been weak).

Good valuations with forecast PE of less than 14 + EV to EBITDA of 5.5.

Good tech component.

Also worth bearing in mind Warren Buffett bought heavily into Japan last year, mainly into what are called "sogo shosha" which translates as trading companies in English, typically large conglomerates.

http://tinyurl.com/336h8xuh

Warren Buffet adds to Japan trading company holdings

Berkshire Hathaway now owns 8.5% on average of top 5 trading houses

June 19 2023

TOKYO -- Berkshire Hathaway, the U.S. investment company led by prominent investor Warren Buffett, said on Monday that it has purchased additional shares in five major Japanese trading houses, sending its average ownership of them to more than 8.5%.

The trading companies are Mitsubishi Corp., Mitsui & Co., Itochu, Marubeni and Sumitomo Corp.

In four out of five companies, Berkshire's holdings exceeded 8%. The company announced its intention to add trading company shares in April, triggering a rally in Japanese equities. The revelation of the increased purchases will likely raise expectations for the further stock rise.

National Indemnity, a U.S. 100% subsidiary of Berkshire, filed a change report with the Kanto Local Finance Bureau on Monday. As of last Monday, Berkshire's stakes in Mitsubishi Corp.'s outstanding shares rose from 6.59% to 8.31%. The shareholding of Mitsui & Co., Itochu, Marubeni, and Sumitomo Corp. also rose from the 6% range to the 7-8% range. The total amount of shares held by Berkshire as of Monday was approximately 2.8 trillion yen.

Berkshire first disclosed its holdings of the top five trading company stocks in August 2020. Buffett followed up with his visit to Japan in April this year and met with the CEOs of five major trading companies one after another.

He said Berkshire owned 7.4% of the five trading company shares as of April, excluding shares of treasury stock. With this additional purchase, the average ownership ratio of the five companies is now more than 8.5%.

In a statement, Berkshire reiterated its intention to hold those stakes for the long term and Buffett's desire to hold up to 9.9% of each of the five companies.

The trading companies, in Japanese called "sogo shosha," welcomed the increase in their shareholdings. Itochu CFO Tsuyoshi Hachimura said, "We are pleased that Buffett increased his stake in the five companies to 8.5% after his visit to Japan, as it shows his trust in the management of each company and his recognition of the growth of the sogo shosha industry," adding that "by giving credit for trading companies, he has achieved a low-risk diversified investment in Japan as a whole."

A spokesperson of Mitsubishi Corp. said, "We will strive to enhance our corporate value through dialogue with our diverse stakeholders." A spokesperson at Marubeni also commented, "We aim to maximize shareholder value, including that of Berkshire Hathaway, by continuing to increase our corporate value."

Marubeni's share price has nearly quadrupled since the end of August 2020, when Berkshire disclosed its ownership. Share prices of the other four companies have also more than doubled, marking much higher than the 44% rise in the Nikkei Stock average.

Compared to the end of March, before Buffett's visit to Japan, all of the stocks have risen more than 30%, demonstrating Buffett's foresight. Since April when Buffett expressed his intention to add stocks of the five major trading companies, foreign investors' purchases of Japanese stocks gained momentum. As there still is room for more purchases of sogo shosha stocks, and the market expects Buffett to further increase his purchases and broaden his holdings.

SSB

ShoeShineBoy

21st Mar

An interesting read:

RPT-BREAKINGVIEWS-Japanese investors becoming the life of the party

Thu 21 Mar

(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own.)

By Jeffrey Goldfarb and Una Galani

NEW YORK/MUMBAI, March 21 (Reuters Breakingviews) - It has taken 35 years to restore faith in the earning power and decision-making of Japanese companies. This confidence is
reflected in the Nikkei 225 Index .N225 reaching, and surpassing, the same record high as during the peak of the country’s economic power in 1989. The painstaking structural
changes contributing to the turnabout are evident in the achievements of three U.S. investors: Warren Buffett’s Berkshire Hathaway BRKa.N , ValueAct Capital and Elliott Management. More importantly, domestic fund managers look poised to keep the
momentum going.

For a long time, Japan was frosty to outside providers of capital, epitomized by the arrival of T. Boone Pickens back when Tokyo-listed companies accounted for nearly half the world’s
market capitalization. The Texas oil tycoon and corporate raider stormed Koito Manufacturing 7276.T after Japanese buyers had scooped up American assets, including Rockefeller Center and Columbia Pictures, without providing reciprocal access to
foreigners. He accumulated 26% of the headlight-maker and pressed for board seats and disclosure about special treatment given to Toyota Motor 7203.T , a major shareholder and
customer, in the first overseas siege of its kind for Japan Inc.

Pickens had his 10-gallon hat handed to him. He stormed out of the annual shareholder meeting and Koito executives scoffed at his demands. Pickens sold his stake in 1991 after Tokyo’s stock market bubble had deflated.

Recent interlopers have received a more gracious welcome. Endoscope-maker Olympus 7733.T invited ValueAct representatives onto its board in 2017, and the fund manager has
since disclosed seven additional investments in Japanese companies that account for about a fifth of the $10 billion it oversees. Elliott, a firm with a more antagonistic reputation,
has deployed at least $4 billion in Japan in the four years since it urged changes at Masayoshi Son’s SoftBank Group 9984.T . And Buffett put his valuable imprimatur on the
country’s sprawling trading houses, with his Berkshire Hathaway recently adding to holdings worth $19 billion at year-end.

The trio’s success, in their distinctive ways, underscores fresh enthusiasm for spotting hidden value in Japan that builds on efforts by closer-to-home aggressors such as Yoshiaki
Murakami and his former colleagues at Singapore-based Effissimo Capital Management. The potential to shake up stodgy and cozy boards, unlock vaults of hoarded cash and lift profitability went unrealized for years. Then-Prime Minister Shinzo Abe renewed hope in 2012 when he fired his proverbial three arrows to revive the stagnating economy, one of which targeted corporate governance.

While the latest outsiders bring high-profile clout, it’s their ability to find common ground with local funds that’s turning the tide. Japanese portfolio managers are increasingly
expressing displeasure at the ballot box and initiating their own dissident campaigns, as foreign activist investors and their tactics steadily become just as integral to the financial
firmament as in the United States and Europe.

Some of the changes are striking. Widespread board shakeups have led to a dramatic increase in the proportion of members deemed independent. At the same time, more directors are facing greater opposition in shareholder votes, according to tallies
from proxy adviser Georgeson. Among them was Canon 7751.T Chairman Fujio Mitarai, whose support fell below 51% as influential shareholders including BlackRock BLK.N voted
against his reappointment. Top brass at electronics group Kyocera 6971.T encountered similar resistance when Institutional Shareholder Services took issue with its stake in
a telecom company. Such cross-shareholdings, a legacy of the country’s interlocking corporate structures, have been dwindling. Neither Canon nor Kyocera were up against any public pressure from overseas investors.

After Abe’s government championed a series of better corporate governance and stewardship practices, the drive to end deflation and stimulate growth spawned more recent directives requiring companies to acknowledge their cost of capital and
explain how they intend to lift valuations above 1 times book value. By this measure, Japanese companies badly lag U.S. and European peers, per investment firm Capital Group. In October, the Tokyo Stock Exchange said even those at the 1 times threshold should be aiming higher. It’s all a far cry from 2008, when the vice minister of economy, trade and industry called shareholders “stupid, greedy, adulterous, irresponsible and threatening,” according to the Wall Street Journal.

ValueAct has seized on the rectifications, seeking to influence videogame developer Nintendo 7974.T , job-search site operator Recruit 6098.T and others with attractive gross
margins and substantial overseas profit. It persuaded Olympus to make the seemingly heretical decision to sell its storied albeit money-losing camera division and concentrate instead on more highly valued medical devices. The fund did something similar at
chip materials maker JSR 4185.T , where ValueAct co-CEO Rob Hale also joined the board. And while he has struggled to persuade Seven & i 3382.T to focus more on its 7-Eleven
convenience stores, ValueAct’s Japan fund, started in late 2022, gained 32% last year, compared to 39% for its flagship fund and 25% in the Topix Index .TOPX .

Elliott is also generating success with its approach. It was an instrumental combatant in the prolonged fight against scandal-ridden Toshiba, winning a board seat and using the
position to ensure the conglomerate kept shareholders apprised about a strategic review that ultimately led to last year’s $14 billion sale. In addition to advocating for better governance at SoftBank and Dai Nippon Printing 7912.T , Elliott nudged both companies into chunky stock buybacks. It is also targeting Japanese companies less known internationally where domestic shareholders have a bigger presence.

Buffett, too, has his own agenda. Berkshire borrowed 1.3 trillion yen ($8.6 billion) in the bond market when interest rates were near zero and plowed the cash into five Japanese
conglomerates – Itochu 8001.T , Marubeni 8002.T , Mitsubishi 8058.T , Mitsui 8031.T and Sumitomo 8053.T – with dividend yields around 5%. The Oracle of Omaha last month praised some of their “shareholder-friendly policies that are much superior to those customarily practiced in the United States,” namely repurchasing shares “at attractive prices.”

If the United States is any guide, there should be considerable improvement to come across Japan Inc. Before barbarians like Henry Kravis and Pickens turned up at U.S. gates in the 1980s, many American companies were almost as hapless with their governance, capital costs and balance sheets as Japan’s pre-Abe.

Goldman Sachs GS.N analysts now expect Topix members to grow earnings per share faster through 2025 than peers in U.S., European and Asian benchmarks. Corporate profitability in Japan also has room to catch up with other regions. Moreover, local hedge funds accounted for almost two-thirds of the record activist activity in 2023, up from about half over the previous five-year span, according to investment bank Lazard LAZ.N . It’s a sign that while foreign investors are helpfully illuminating opportunities, domestic ones will be leading the
charge.

Follow @jgfarb on X

Follow @ugalani on X

KevinS1

22nd Mar

Interesting article - and exactly why I am invested in Nippon Active Value Fund (LON:NAVF) who are doing exactly the same.

It has gone well over the last few months and I will be looking to build my position further based on the view that there is still a long way to go in this battle.

ShoeShineBoy

24th Mar

Some Japan links I have been meaning to post. Very different economic background and perhaps an impact globally if Japanese investors start to withdraw from foreign assets and bring their wealth back to Japan now that Japanese listed equities are on the move thanks to inflation for the first time in decades and reduced central bank intervention.
BoJ policy is slowly shifting but it is happening.

https://tinyurl.com/8sxktsnu

Reuters podcast: Japan's rate shift will hit zombie firms hardest.

https://tinyurl.com/vj8uwnhy

Good history of how Japan got to its current position of deflation and negative interest. And now, just as other central banks may be about to start cutting rates (admittedly, now only 3 cuts rather than 5 for the Fed), the BoJ is looking to raise rates in response to inflationary forces. After the crash in 1989, lots of retail investors in Japan either saved their money or invested it abroad. Now, those trends are starting to reverse with more money being brought home from foreign investments (so the impact of the BoJ policy shift will not only be felt in Japan but in foreign markets as well) and more money being invested in the home market. But not all Japanese companies are winners with some going out of business due to the traditional pressures that higher interest rates bring.

Reports are of significant wage rises but still not enough to keep up with inflation.

https://tinyurl.com/3jn7km4j

Japan's annual labour talks with major firms ended up with pay raises of 5.28%, the highest in 33 years, the country's largest union group said on Friday, reinforcing views that the county's central bank will soon shift away from a decade-long stimulus programme.

The bumper outcome comes as the Bank of Japan looks close to ending eight years of negative interest rate policy. BOJ officials have stressed the timing of a pivot would depend on the outcome of this year's wage negotiations.

Policymakers hope that hefty pay rises will boost household spending and produce more durable growth in the broader economy, which narrowly avoided slipping into recession late last year.
Workers at major firms had asked for annual increases of 5.85%, topping the 5% mark for the first time in 30 years, according to trade union group Rengo.

The union group, which represents about 7 million workers, many at large companies, had set its eyes on more than 3% of base pay hikes -- a key barometer of wage strength as they determine wage curves that provide the basis of bonuses, severance and pensions.

Analysts had expected a rise of more than 4%, which would be the biggest since the early 1990s, after last year's 3.6%, itself a three-decade high.

The government is counting on such wage hikes to trickle down to smaller and medium-sized firms, which account for a whopping 99.7% of all enterprises and about 70% of the country's workforce, but many lack the pricing power to pass higher costs on to their customers.

Wage talks for most smaller companies are expected to concluded by the end of March.
Even though Japanese companies have been raising pay, the increases have largely failed to keep up with inflation. Real wages, which are adjusted for inflation, have now fallen for 22 straight months.

Quoted Data article: Another great year for AVI Japan Opportunities

https://tinyurl.com/msfycz78AVI

Japan Opportunity Trust (LON:AJOT) looks to invest in Japanese listed equity investments that have a significant proportion of their market cap held in cash, listed securities and/or realisable assets. In the UK, this is the type of thing that is measured by IFRS 13. AVI Japan Opportunity Trust (LON:AJOT) is up 7% over the last year but trading on a discount of 5% which may not seem a lot but is almost the widest in 10 years. The top 10 positions make up 70% of the trust. The only thing that goes against this trust in my opinion is that it's relatively small and so asset wealth mgt firms will have little interest as a position in the trust will not move the dial for them.

What is really interesting from this article are the following two pieces:

The only real negative was the ongoing weakness in the Japanese yen [if and when this changes, UK-based investors could suddenly see significant gains on their Japanese exposure]. To illustrate the impact of the weak currency, since its inception, AVI Japan Opportunity has delivered returns of +40.5% versus +16.2% for the benchmark. In JPY terms, since inception, returns are significantly higher, at +73.7% vs +43.6% for the benchmark.

[These numbers clearly illustrate the success of AVI Japan Opportunities’ approach. The encouraging thing is just how much more there is for the trust to achieve. Even after this success, almost half of the total market cap of the companies in the portfolio is represented by cash sitting on these companies’ balance sheets, much of which is idle.]

The manager, AVI, has continued constructively engaging with portfolio companies to unlock value. Detailed letters or presentations sent to nine portfolio companies over the year. Three portfolio companies were the subject of public engagement, including NC Holdings, where three of our shareholder resolutions were successfully adopted.

ShoeShineBoy

1st Apr

I listened to a good MoneyWeek interview this last week with Joe Bauernfreund, manager of AVI Global Trust (LON:AGT) and AVI Japan Opportunity Trust (LON:AJOT). I can't find a suitable link I'm afraid, the interview is definitely available on the Apple podcast app. My notes below:

# Japan has had a good year but is still cheap compared to other markets.

# Investors now recognise companies are more interested in shareholder returns through corporate governance changes.

# Cash has typically flown into Japan large caps (SSB: following Warren Buffett ?) and those stocks are not particularly cheap anymore. There is more value in mid and small caps.

# AVI Global Trust (LON:AGT) holds 20% in Japan.

# Reform is happening but slowly - patience required!

# Historically, maintaining good employment levels and making a contribution to the country was more important than shareholder returns. This is now changing.

# Cross shareholdings are also now being unwound in certain cases, especially where 1 of the entities larger than the other.

# Regulators are now being more direct re: cross shareholdings and requesting action to unwind them.

# Habits have changed. Asset Value Investors now has access to almost any company it wants to speak to in Japan. There are much fewer closed doors.

# Everyone in Japan was scarred by the 1990 crash and as a result always wanted cash for a rainy day.

# There has been a generational shift. Younger generation more motivated by personal wealth.

# AVI trying to persuade companies to reduce the cash on their balance sheets by increasing payouts/dividends. This also has a positive impact on balance sheet efficiency.

# If you only listen to 5 minutes of this podcast then this is the piece to pay attend to: "the big opportunity for AVI…. there is now pressure from various parties to use their cash better" [23 minutes]

# AVI Japan Opportunity Trust (LON:AJOT) runs a concentrated portfolio. 15 main names.

# Large caps have gone up a lot but small caps have not increased to the same extent. This is partly because there is little analyst coverage of small caps in Japan.

# AVI Japan Opportunity Trust (LON:AJOT) is a relatively new trust. It started in 2018.

# Private Equity is expanding in Japan, both foreign companies and local companies.

# Japanese companies have a preference for being listed over staying private for longer.

# Interviewer asks "Is the big deflation over ?" JB answers a resounding "Yes! With first pay rises in 40 years".

SSB: so what does a quick search on Google reveal about the PE ratios of the top 10 holdings (70% of the NAV, wow, a really concentrated trust!) in AVI Japan Opportunity Trust (LON:AJOT):

Eiken Chemical: PE of 25

Takuma Co: 20

Nihon Kohden Corp: 20

TAI Holdings Co: 10

Konishi Co: 16

DTS Corp: 19

Shin-Etsu Polymer Co: 18

Jade Group: 24

Wacom Co: 19

Beenos Inc: 11

Doesn't seem super cheap to me but maybe we need to take other metrics into account (price to book value ?).

Latest IC tells me the Nikkei 225 average PE is 24 versus 25 for the S&P 500 and 11 for the FTSE 100.

All guess work on my part and the reason why I put some of my trust in managers who know (or I think know) more than me about foreign markets.

A really enjoyable and educational listen. So many differences between Japan and other markets at the moment.

I hold AVI Global Trust (LON:AGT) but not AVI Japan Opportunity Trust (LON:AJOT). Only downside to AVI Japan Opportunity Trust (LON:AJOT) is the mkt cap is only approx 200m so how many wealth mgt companies will buy this ? Views welcome.

SSB

ShoeShineBoy

1st Apr

Reading the CC Japan Income and Growth Trust (LON:CCJI) February update today, I found something out I didn't previously know: the Nikkei 225 Index is price weighted. Not my favoured trust for Japan. Interesting all the same though.

https://tinyurl.com/mt3zycmb

Japan

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ShoeShineBoy

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