Mythbusting: The “no growth in Japan” myth

We are often asked about our exposure to Japan; specifically, why it is consistently the biggest single direct country exposure in our Invesco International Small-Mid Company Fund, making up 21.6% of the fund’s total net assets as of May 31st, 2023. After all, everyone knows that Japan is a slow growth economy. Not only that, it’s common knowledge that much of corporate Japan has not had much of a focus on shareholder returns, traditionally choosing to emphasize market share and full employment instead. So how could we find more companies to invest in there than in any other country? And why would we want to go there looking for more, as we did in mid-September?

The answer is simply that the general rate of growth for an economy often bears very little relationship to the growth rate of individual companies within it. This is particularly true in Japan, especially among smaller companies. Why is this? There are two reasons.

One is that many companies in Japan offer specialized products to a worldwide market and are not dependent on the Japanese economy for their growth. The other reason is that within Japan, as within other economies, there are quite a few newly emergent disruptors taking market share and industrials.

Successful global leaders

Among the successful exporters in Japan, one finds both large and small companies. An example in our portfolio is Daifuku, one of the global leaders in material handling technology. For instance, the company supplies fulfillment warehouses with equipment that enables them to automate storage, retrieval, and shipping. It makes the baggage handling systems used in many airports around the world. Car manufacturers have long applied the company’s equipment to increasingly automate various stages of production. Daifuku earns roughly two-thirds of its revenue outside of Japan.¹

Another example in our portfolio is Sysmex Corp. Sysmex makes equipment and supplies used for testing blood and urine samples and relies on the export market for approximately 85% of its sales.²

Emerging disruptors and generational change

When it comes to disruptors in Japan, many are applying new technologies to old activities, disrupting traditional customer acquisition and delivery systems. One example in our portfolio is MonotaRo, a distributor of products used at manufacturing and construction sites. MonotaRo moved early to put its catalogue online and adopt an e-commerce delivery model.

Another company that did the same in a very different area is As One. This company supplies specialized health care products — ranging from equipment to the consumables used by them — to professional customers such as research labs, clinics, and hospitals.

Furthermore, most of these disruptors are found in the small- and medium-capitalization segments of the Japanese market. The main reason for this is simply that they began their disruptive activity relatively recently. Typically, they are either new companies founded within the past 20 to 25 years, or small older companies that were taken over within that same time frame by new managers who applied the disruptive business model they currently use.

More interestingly, these companies also reflect emerging generational change in corporate Japan. They are headed by younger leaders, many of whom have been educated by American business schools. Perhaps as a consequence of this, their attitudes to shareholder returns differ markedly from the traditional Japanese stereotype.

Our approach

The growth rate of an economy is the aggregate of the rates of growth — and decline — of the various areas within it. As we have always reminded ourselves in the Global Equities group, we invest in “companies, not countries.” When we look underneath the surface in Japan, we find a rich pool of companies to consider for inclusion in our International Small-Mid Company Fund.