The Japanese bull market is far from over, according to veteran fund manager Hideo Shiozumi, who said labour shortages, an ageing population and a lack of uptake on technology are presenting real opportunities in the country.
He runs the five FE Crown-rated Legg Mason IF Japan Equity fund, which has been the top performer in the IA Japan sector over the last decade returning 839.03 per cent, albeit with high levels of volatility.
“We think investment in Japan should be driven by an underlying understanding of the future of the Japanese economy, how it can be revitalised and what measures will be taken to achieve this,” he said.
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
“Many investors know what Japan is facing but very few are taking the investment strategy by focusing on sectors and companies that will benefit from Japan’s economic and social changes.”
However, to understand where Japan is going, investors should start with where it has been. In the 1960s, 1970s and 1980s Japan’s high economic growth was driven by traditional labour practices categorised by long working hours, seniority system and lifetime employment – all of which today are regarded as negative and in need of reform.
“After the collapse of the asset bubble economy in 1990, Japan entered the two decades of deflation and went through restructuring but because of the lifetime employment system it took companies 10 years to lay off employees,” Shiozumi said.
However, today Japan is in transition period, with a number of factors leading to improving economic growth.
Indeed, Japan’s economy is now boasting its longest continuous economic expansion since the 1980s boom and corporate performance has meant stock prices have more than doubled in recent years, hitting the highest level in 27 years.
As well as this, the Japanese yen weakened more than 30 per cent against the US dollar while the labour market is at its tightest for 44 years.
But there is still some way to go. Wage growth remains stubbornly low, while businesses have not yet changed their wary stance towards utilising the substantial funds they hold.
“To give them a supportive push, the [prime minister Shinzo] Abe administration is fostering an environment in which solid demand and earnings can be expected,” the fund manager said.
“Abenomics aims at revitalising economic growth by stimulating productivity growth and to boost productivity it proposes to reform the traditional working style in Japan.”
It is the biggest legislation on workstyle reform in 70 years and will has to main objectives – to rectify long working hours and to promote a system of equal pay for equal work. 
Currently, the manager said, many workers are what known as non-regular workers – those on temporary contracts.
Today, regular workers occur for about 60 per cent of the total workforce and 70 per cent of them are male while women account for 70 per cent of all of the non-regular workers.
“Equal pay for equal work provides guidelines for standardising treatment of regular and non-regular workers. It will narrow the wage gap and motivate non-regular workers,” Shiozumi (pictured) said.
“The narrowing gap will promote mobility between non-regular and regular positions as employers seek to retain staff amid the ongoing labour shortage.”
Major workstyle reforms are essential to revitalise the economy as they will break traditional labour practises, increase labour mobility, stimulate productivity growth and increase consumer spending.
Source: Legg Mason
The other area that needs to be considered from an investment point of view is the ageing population; 34 per cent of the population is over the age of 60, while people aged 70 or older –such as Shiozumi himself – make up 20.7 per cent.
However, the current generation of over 60s is very different from a decade or two ago – they are healthier, more vibrant and potential most importantly are richer.
“Households over 60 years old hold 69 per cent of total household financial assets,” Shiozumi said, meaning that elderly people are spending their money on goods and services that a previous generation might not have.
Additionally, conventional lifestyle norms are also changing dramatically.
“The number of Japanese who have never married by the time they reach 50 has risen sharply to 24 per cent for a man and 15 per cent for women,” the Legg Mason manager explained.
As well as this, married Japanese people are increasingly choosing not to have children, meaning that the population has “significantly more free time”.
Combining the two aspects, childless seniors also do not have to worry about preserving massive financial assets to pass on to younger generations.
So, what does all this mean for investors?
Well, work style reforms and a richer ageing population should in theory lead to more consumer spending and a better economic picture. Yet, this has not transpired so far.
As such, the current bull market in Japan, which started in 2012 when Abe came to power, should continue to run until the impact of these phenomena are being fully felt.
“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria,” said Shiozumi. “We believe the Japanese market is still at the second stage of a long-duration bull market that will last over the next several years.
“We think the current bull market will last until work style reforms start to bear fruit and the Japanese economy becomes revitalised – which is still a long way to go.”
He added: “Lasting reforms take time as it is not easy to break traditional business and labour practises but at the point that that time comes investors will become optimistic and that is third and fourth stage.”
Within the market, he said that there are a number of areas with technology that he can exploit as Japan – despite leading in many areas – is beginning to lag the rest of the world in e-commerce.
“Room for improvements create investment opportunities and one sector is e-commerce. Penetration rate is only 7.9 per cent,” he said.
Japan is also falling behind other nations in promoting cashless payments. The cashless settlement rate in private consumer spending is 20 per cent – far lower than the 89 per cent in Korea and 45 per cent in the US.
“There are many companies that are growing very fast and there are many other new growth businesses being created under a rapidly changing economic and social structure,” he said.
“Japanese investment should be focused on such sector as e-commerce, outsourcing and tourism as well as those finding growth opportunities in an ageing society.”
Current breakdown of fund
Source: FE Analytics
Currently, the £1.1bn Legg Mason IF Japan Equity fund is mostly weighted to industrials and healthcare stocks with consumer staples, discretionary and services making up a big chunk as well.
“Our portfolio is well positioned to benefit from workstyle reforms which aims to invigorate consumer spending and stimulating the creation of new businesses and industries amid an ageing population,” Shiozumi said.