A Guide To Investing In Japan

8th Oct '15 by Alex Naamani

3 comments 15745 reads

All of us at some point will have played tunes on a Sony Walkman, driven a Toyota, or watched our favourite TV programme on a Panasonic. Japanese companies are responsible for some of the world’s biggest brands and most popular products that we use on a day-to-day basis. Stockopedia is therefore pleased to announce that we will soon be providing investors with the data they need to analyse stocks in the Land of the Rising Sun. We have put together this guide to help you gain a deeper understanding of Japanese stock markets and further explore investment opportunities in the East.

Why?

Economic Powerhouse

Towards the end of the 19th Century Japan became the first Asian economy to industrialise. It has been a global economic powerhouse since the country's 'economic miracle' gathered momentum in the years after the second world war. An important factor supporting this 'miracle' was the emergence of keiretsu - essentially groups of companies with interlocking business relationships, that shielded constituent firms against foreign competition and takeovers. Many familiar companies emerged under and are still part of these keiretsu. For example, the multinational conglomerate Hitachi is part of the DKB Group keiretsu. Toyota Motor and Toyota Industrial (the world's largest manufacturer of forklift trucks) are both, you guessed it, part of theToyota Group keiretsu.

Much of Japan's economic growth in the post-war period was based on the expansion of manufacturing in areas such as automobiles. Today Japan remains the world's largest automobile manufacturing country and is of course home to companies like Toyota, Honda and Nissan. Looking beyond manufacturing, Japan is currently the world's third largest economy in terms of GDP and the fourth largest in terms of Price Purchasing Parity (PPP).

Technology Leader

Japan has gained a particularly strong reputation as a world leading producer of high-tech goods. Several socio-economic factors are conducive to this technological innovation. The country has a high R&D spending to GDP ratio, and on the demand side Japanese consumers are generally 'early adopters' who embrace new technology before most other people. Historically Japanese companies like Casio and Sony introduced gadgets like the portable calculator and the Walkman. Today Japan remains a technological leader, recently ranking 4th in Bloomberg’s Global Innovation Index, ahead of Germany which ranked 5th and the UK which…

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WDWombat

18th Apr '16

Not a bad introduction but may I be allowed to makea couple of small clarifications?
Japan, as a manufacturing base, is the 3rd largest producer of autos and commercial vehicles after China and the US. Japanese domiciled companies produce easily the largest numerical amount of vehicles but approx. 2/3rds of their production is offshore. This is principally a result of the long-term appreciation of the yen.
It is also worth mentioning that Japanese domestic accounting is quite different to that practised in the UK. It is generally considered much more conservative due principally to the treatment of R&D, which is generally expensed entirely on the P&L, and goodwill which is amortised annually. However, companies with dual listings in the US also produce GAAP accounts and these are the bulk of internationally known Japanese corporations.

Rusty2

My only experience is with funds, I bought 2 about 18 months ago, Schroder Tokyo and Legg Mason IF Japan Equity. Schroders is up about 18% and Legg Mason about 90%, I have now sold both, Schroders some time ago and LM more recently. My concern is China if that goes then Japan will quickly follow. As per individual companies I don't know enough about them, for me its better to invest in funds, easy to trade, no currency or broker or tax issues and can hold in an ISA.

Alex Naamani

19th Apr '16

Hi Wombat,

Many thanks for this. I agree re Japanese accounting. In Japan, Goodwill is amortised over a twenty year period. Elsewhere, Goodwill does not need to be amortised; instead it must be tested for impairment annually and if there is no impairment Goodwill can remain on the balance sheet indefinitely. So in this sense Japanese accounting is more conservative given that a company is much more likely to incur losses from amortisation.

With regards to R&D, US and Japanese GAAP are perhaps comparable. As you point out, R&D is expensed in Japan. Likewise, under US GAAP R&D is expensed as incurred. IFRS standards are perhaps a little less conservative as the R must be expensed while the D can be capitalised. What are your thoughts here?

Over the next few weeks I'll try to find time write an article comparing Japanese to other accounting standards.

Best,

Alex

A Guide to Investing in Japan

Why?

Economic Powerhouse

Technology Leader

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Alex Naamani

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