Japan: Sustainability and digitalisation

by Aaron Scully, CFA – Portfolio Manager

Japan is renowned for its rich history, idyllic landscape and one-of-a-kind inventions. It is also home to the oldest known business in the world, Kongō Gumi, a construction firm specializing in temples and shrines, founded in 578 AD. With this wealth of business experience in mind, I took a trip to Japan to learn more about the companies that operate there as well as its economic and political climate. These were my key findings:

1. Sustainability is becoming ubiquitous

 The idea of sustainability is not new to Japan; the ancient concept of “Mottainai” – to respect and not waste resources – has sustainability embedded into Japanese culture. According to the UN’s Sustainable Development Report Japan ranks 19^th out of 193 Member States in terms of its progress towards achieving the Sustainable Development Goals, putting it among the top countries in Asia with regards to sustainability. Indeed, Japan has become a leader in championing sustainability efforts in Asia with many of its policies and initiatives in line with the 2030 Agenda for Sustainable Development.

It should perhaps have been no surprise then to be greeted by a billboard promoting sustainable innovation at Tokyo’s Haneda Airport and to come across an advert for Climate Group’s EP100 initiative on a TV in the back of a taxi. In my short time there it became clear that sustainability is a key focus for Japanese policy.

The Streets of Tokyo

2. Japanese companies are finding it increasingly more difficult to find workers

Japan has the highest proportion of elderly citizens of any country in the world, which puts a great deal of pressure on its labor force. This reality has been exacerbated by the measures imposed at the onset of the COVID pandemic, which saw a decrease in foreign workers and a smaller portion of the labor force return to work after restrictions were lifted. Difficulty finding workers was a relatively common theme in the company meetings that I attended, with many management teams expressing that this could limit their ability to grow over the medium and long term.

Digitalization can offer a solution to labor shortages in many cases by filling critical but often mundane roles. Doing so enables companies to realise efficiencies and creates space for more meaningful roles that are more appealing to workers. But while this may be a good solution, the Japanese economy is currently behind the curve when it comes to digitalization relative to the rest of the Western world.

The good news for investors is that companies which offer automation and business solution services are well placed to benefit from this theme as the need for digitalization increases. These businesses could include tools which support business operations such as TechnoPro, a technology-focused staffing and services company, or cloud computing tools such as those provided by Rakus, a cloud services provider for small and medium-sized enterprises (SMEs). Digitalization also allows for companies to utilize data-driven insights to better understand customers, identify inefficiencies and improve existing functions, which should ultimately provide benefits for all stakeholders.

While Japan might be lagging in terms of digitalization, the country’s manufacturing ingenuity is undeniable. Here I am standing in front of the world-famous Shinkansen, known by many as the bullet train.

3. Japanese companies are moving operations away from China

It became apparent upon meeting many Japanese companies that they are becoming more aggressive in their intentions to decouple from China. This was evident in the fact that some of the companies that I met with are choosing to build more manufacturing capacity outside of China and ensuring that critical technology is nowhere near Chinese shores. While the extent of any threat that China poses to Japan is up for debate, these actions clearly signal plans to take back control of strategically important industries and operations.

It should be noted that Japan is not alone in these efforts. Companies across Europe and North America have begun reshoring operations and supply chains as the weaknesses associated with globalization have become a reality over the past two years. Interestingly, we have seen many developed world policymakers put sustainability at the core of policies intended to rebuild a sustainable and digital economy. In a policy speech by Japanese Prime Minister Fumio Kishida, the intended post-COVID growth strategy “will work to resolve social issues, including digitalization, climate change, economic security and science, technology and innovation”.

As the sun sets over an era of globalization, we expect that the new environment – in which economic security goes hand in hand with digitalization and sustainability – will offer plenty of opportunities for investors globally.

A magnificent sunrise, strikingly similar to the Japanese flag – the land of the rising sun.