Japan’s hidden opportunities: Workation to the Land of the Rising Sun

Why Japan? Timing and Circumstance

The allure of Japan as an investment destination has always been there, but certain factors have made it even more compelling recently. Post-COVID, with the rise of the work-from-anywhere culture, my timing couldn’t have been better. Japan’s currency, the Yen (JPY), has crashed to levels not seen in decades, and the country has become more affordable for foreign travellers and investors alike.

This trip wasn't just a spur-of-the-moment decision. The stars aligned: the crashing Yen, a one-hour time difference from Australia, and an opportunity to explore Japan's business climate firsthand. But the story runs deeper than just currency and convenience. Something is happening in Japan—a mix of cultural shifts, economic dynamics, and global market changes—that is creating unique opportunities for investors.

Japan’s hidden investment opportunities: My work-cation and research trip to the land of the rising sun

As financial investment advisors, we are always on the lookout for new investment opportunities, and there’s no better way to understand a market than by immersing oneself in its culture. This past September, I took my family to Japan for a "work-cation"—a blend of more work than a holiday—to explore the potential investment landscape of this fascinating country. 

From Tokyo Disneyland & Sea, the ominous Mt Fuji, the Onsen’s of Takayama, Wagyu beef of Hida, to the Golden leafed ice cream of Kanazawa, the Temples in Kyoto and the kitchen of Japan, Osaka. It was more than just a family trip and a search for incredible Wagyu, Hida Beef and Sushi; it was an on-the-ground research mission courtesy of a Toyota-Rent-a-car to gather insights and build a thesis on Japan’s economic potential in the wake of recent global shifts.

Also, we explore; can Disney’s amazing cash cow Disneyland/Disney Sea Resorts and Parks save it from its "go woke go broke" trajectory, are Japanese manufacturers' goods like quality cars, gaming, Pokemon, real estate and electronics still at the forefront and how will Japan’s economy potential respond in the wake of recent global central bank and political shifts?

Crashing Yen and Economic Impact

Let’s start with the most obvious change: the Japanese Yen In April 2024 fell to a 34-year low, trading at over ¥160 per USD, a steep decline from around ¥110 per USD in mid-2021. The primary driver was Japan’s ultra-loose monetary policy, maintaining negative interest rates since 2016, while other central banks, like the U.S. Federal Reserve, aggressively raised rates to combat inflation. This divergence led to a capital outflow from Japan, causing the Yen to weaken further.

The Bank of Japan (BoJ) stepped in, spending approximately $62 billion on interventions to support the Yen. However, these efforts only temporarily halted the currency's decline. Japanese assets, including real estate and equities, became significantly cheaper for foreign investors, sparking renewed interest in these markets. As a result, Japanese export companies experienced improved competitiveness due to cheaper products on the global market, potentially enhancing profitability.

A critical aspect of Japan's monetary policy is its reliance on the U.S. economy. The BoJ has been purchasing U.S. Treasury bonds to peg the Yen to the USD, which makes the Yen vulnerable to shifts in the U.S. economic landscape. During the Biden-Harris administration, U.S. fiscal policies, including extensive money printing and high government spending, have led to a weakening dollar. This scenario inadvertently put pressure on Japan’s carry trade—where investors borrow in Yen at low interest rates to invest in higher-yielding U.S. assets. As the dollar weakened, the unwinding of this carry trade further devalued the Yen.

This phenomenon also impacted global markets, including the NASDAQ. During the Yen's depreciation in early 2024, the NASDAQ experienced a sharp downturn. According to data from Bloomberg, the NASDAQ dropped by around 15% during this short period. Market recovery only began when the BoJ intervened in bond markets, stabilising the Yen and providing relief to investors engaged in carry trades.

Furthermore, the BoJ's intervention to stabilise the currency reflects Japan's dependency on U.S. economic health. As of 2024, Japan holds over $1 trillion in U.S. Treasury bonds, making it one of the largest foreign holders. This strategy ties Japan’s monetary policy closely to U.S. fiscal and economic conditions. The BoJ's actions also revealed the extent to which Japan's economic policies can impact global markets, emphasising its role in maintaining financial stability.

This was one of the key reasons I decided to head to Japan. I wanted to see how the weakening Yen was affecting local businesses and whether this currency slump could translate into investment opportunities. With the Yen’s crash, Japanese export companies have become more competitive internationally, potentially boosting their profitability. The question on my mind was: Which sectors are set to benefit the most?

Diving into Japan’s unique demographic and economic landscape

Japan’s economy is unique, largely due to its demographic challenges. The country has an aging population, with around 29% of its citizens aged 65 or older as of 2024. By 2040, this number is expected to rise to 35.3%, which could have significant implications for sectors like healthcare, real estate, and consumer goods. During my stay, I noticed how Japanese society is adapting to this demographic shift. Services are increasingly geared towards the elderly, and businesses are innovating to cater to this growing market segment.

On the flip side, Japan’s youth are facing cultural tensions. Many young people I spoke with expressed a desire to move abroad, seeking the freedoms offered by Western societies. Japan’s strong cultural norms and societal expectations can make it challenging for the younger generation to find their own path, leading some to look overseas for opportunities. A 2024 survey by the Nippon Foundation revealed that 70.8% of young Japanese people expressed concern about Japan's future. Additionally, the survey found that 62.9% of respondents were concerned about their own prospects in Japan. This youth exodus could have implications for Japan's future labour force and economic growth.

Japan's cost of living: A refreshing perspective

The idea to explore Japan was always there, the crashing Yen made it financially attractive, and the final push came after catching up with an old rowing friend, from my 2nd Eight days at Joeys during our 20-year reunion this year, he has been living in Tokyo for several years and suggested I visit to see it all firsthand.

One of the first things that struck me upon arriving in Japan was how different the cost of living is compared to Sydney. In Japan, I was able to do a full grocery shop for 10,000 Yen (about $100), which included premium items like Wagyu beef, High-end Sake, chicken, vegetables, fruit, eggs, and rice. In Sydney, the same shop would easily cost upwards of $200. A common joke with our friends is, “You can’t leave the house these days in Sydney without spending $200 on practically nothing”? Sad but true. This realisation came against the backdrop of rising inflation in Australia, fuelled by money printing events and other variables such as the recent revelations from the Australian Competition & Consumer Commission (ACCC).

While I was in Japan, the ACCC brought to light an investigation into Coles and Woolworths for hiking prices and offering fake discounts, practices that contributed significantly to the inflationary pressures in Australia. This issue was further exacerbated by government policies, including those by the Albanese administration, which have not effectively curbed corporate pricing power or tackled land-banking practices. Experiencing Japan's affordability while watching this news unfold gave me a unique perspective. Despite Japan's relatively low wages, according to friends living in Tokyo with whom are from Sydney, the cost of living is far more manageable in Japan. In Sydney, inflation is making everyday life increasingly expensive, impacting not just groceries but also basic necessities.

My good friend from Sydney I mentioned, who’s been living in Japan for a number of years, had some interesting observations on this point debated over sushi trains and sake. He mentioned that Japan’s cost of living is quite reasonable, although it comes with its own challenges. A $100,000 income is almost unheard of for regular employees in Japan. This means that while the country is a haven for travellers and remote workers with foreign income, it presents different dynamics for locals. This nuanced understanding is crucial when assessing the real economic landscape of Japan versus other markets.

Health and Lifestyle: The Japanese Advantage

Another aspect of Japan that stood out was its emphasis on health and food quality. As someone who manages dietary challenges like celiac disease and histamine intolerance, I was fascinated to see how my body responded to traditional Japanese foods. I spent three weeks eating rice, vegetables, Wagyu beef, sake, sushi and chicken, all prepared with the kind of care and quality control that Japan is known for. Not only did I feel great during my stay, but I also experienced none of the bloating and discomfort we may face from processed food back home.

The Japanese government's strict food standards, such as the Rice Act in 1921, banning rice older than 24 hours to be sold or consumed, because the Japanese found mould, in which they also found the mycotoxins growing in the rice were directly and negatively affecting the heart. This stands in contrast to Western societies, where processed foods, chemical preservative additives and lower food quality standards contribute to rising health issues. 

It reminded me of Robert F. Kennedy Jr.'s statement: “Every major pillar of the U.S. healthcare system as a statement of economic fact makes money when Americans get sick. The most valuable asset in this country today is a sick child.” (Quote source from RFKs speeches and interviews organised by the Children’s Health Defence a non-profit organisation he founded). 

This observation got me thinking about the potential investment opportunities in Japan’s health and wellness sector, particularly companies that produce high-quality foods and health products. Not just the investment thesis, but also the moral and ethical thesis, as when we landed back in Sydney, hate to say it, but have you ever noticed how “swollen” a large percentage of our society looks?

Quick deep dive into RFK’s points on healthcare budget and autism

Robert F. Kennedy Jr. has been vocal in his criticism of the Western healthcare and pharmaceutical industries, arguing that their economic incentives do not align with promoting public health. 

According to his viewpoint, these companies profit from maintaining a population dependent on medication and treatments. Specifically, he has stated that they don't seek to kill people but rather to make children as sick as possible, as early as possible, to ensure long-term reliance on the healthcare system.

1. Healthcare Budget Comparison

Kennedy often references the drastic increase in the healthcare budget over the past decades to highlight how healthcare spending has ballooned. He suggests that when his uncle, John F. Kennedy (JFK), was in power during the early 1960s, the budget for healthcare and managing sick children was relatively small compared to today's spending.

While Kennedy does not always provide precise figures, we can look at historical data to contextualise this claim. In the early 1960s, healthcare expenditures in the U.S. were roughly 5% of the country's GDP. By contrast, today's healthcare spending accounts for approximately 18% of the U.S. GDP, which amounted to more than $4.1 trillion in 2020 and $4.5 trillion in 2022. 

This exponential growth underscores the shift in healthcare costs in the U.S. over the last few decades. In addition to this general rise, specific healthcare programs like Medicaid and the Children's Health Insurance Program (CHIP) alone accounted for over $600 billion in expenditures in 2020 and in 2022, total Medicaid spending in the U.S. reached $804 billion showing just how much the budget for managing child health issues has grown since the 1960s.

2. Autism rates

RFK Jr. frequently discusses the alarming increase in autism rates over the past several decades, attributing this rise to various factors including the introduction of certain vaccines, chemicals in food, and environmental changes. He points to a notable shift starting in the 1990s when more vaccines and additives began to become commonplace.

• Autism rates in the past: Kennedy states that, historically, the rate of autism in the 1960s was approximately 1 in 10,000 children. During this period, autism was relatively rare, and awareness and diagnosis were minimal.

• Autism rates today: Kennedy highlights that autism rates have skyrocketed to around 1 in 36 children as of recent CDC data. This translates to approximately 2.8% of children now being diagnosed with autism, representing a dramatic increase from the numbers seen in the past. This significant rise in autism rates is often central to Kennedy’s critique, as he connects it to broader changes in public health policies, vaccine usage, and chemical exposure.

The context for RFK Jr.'s Views

Kennedy's claims are rooted in his critique of how the healthcare and pharmaceutical industries have evolved over the decades, arguing that the focus has shifted from promoting public health to prioritising profit. His discussions frequently target the increased use of vaccines, the presence of chemicals in food and medicine, and the influence of pharmaceutical companies on public health policies. 

By pointing out the exponential growth in healthcare spending and the steep rise in conditions like autism, Kennedy emphasises what he sees as a systematic failure to prioritise the long-term health of the population, particularly children.

Why the interest in Japan, the American health system, geopolitical and economic considerations?

While in Japan, I couldn't ignore the geopolitical and economic changes on the horizon. The outcome of the upcoming U.S. presidential election could significantly impact global markets and, by extension, Japan's economy. If a Kamala Harris-led administration pushes policies like taxing unrealised capital gains, market volatility could rise and worst case scenario, the systematic potential collapse of the value of the USD. In contrast, a Trump or RFK Jr. presidency focused on strengthening the U.S. economy might stabilise the USD, indirectly benefiting Japan’s export-oriented companies.

Japan's reliance on exports, particularly with a weaker Yen making its products more competitive, could create profitable opportunities for investors in sectors such as technology, automotive, and consumer goods. Funds like the Arcus Japan Fund already show how tapping into these markets can yield impressive returns, making a strong case for a strategic investment in Japan.

Can parks/resorts like Tokyo Disneyland and Disney Sea, Save Disney from 'Go WOKE, Go BROKE'?

The best way to truly understand a company, its culture and economic landscape is to immerse oneself in it. With this in mind, we took out a small mortgage and stayed at the magical Tokyo Disneyland Hotel and explored both Disneyland and DisneySea for all they had to offer. It was impressive to see how clean, well-managed, and bustling these parks were, even on a random Thursday and Friday. These parks are incredibly busy, profitable and rank among the most visited globally. However, they represent just one piece of Disney's vast portfolio and are not sufficient to compensate for the company’s larger strategic challenges, particularly in content creation and media distribution.

• Content division struggles: Disney's film and media division, notably under Kathleen Kennedy's leadership at Lucasfilm, has faced backlash and underperformance related to content controversies. This has directly impacted Disney's profitability. In 2023, Disney's total revenue was $88.93 billion, yet the profit margin was just 3.36%, yielding a net income of $2.99 billion. This suggests that losses or low returns from underperforming film projects weigh heavily on overall financial health.

• Streaming wars: Disney+ has become a major focus, but it has been costly to operate. With slowed subscriber growth, the high investment in streaming content has yet to provide consistent profitability. Despite the platform's importance, Disney's heavy spending on original content and marketing has strained its finances, contributing to a total debt of approximately $47.69 billion as of the end of 2023.

In summary, while Disney’s parks, including Tokyo Disneyland and DisneySea, are high-performing assets contributing significant revenue, they are not enough to single-handedly offset the challenges Disney faces in its content and media strategy. The company's long-term recovery and growth depend on successfully navigating its content strategy, stabilising streaming services, and managing its diverse entertainment empire more effectively.

Amendment: Was pointed out by an associate on Livewire that “the Tokyo Disney Resort is owned and operated by the Japanese company, Oriental Land Co Ltd <TYO:4661>. They license the rights to it from Disney. They are listed on the Tokyo Stock Exchange and are well worth more research”. Thanks again for pointing this out and digging into this tonight over a glass of sake.

The Arcus Japan Fund: A case study for Japan’s market potential

To gain a better understanding of the market, I looked into the Arcus Japan Fund before departing and reached out to the investment team to learn more, This fund manager serves as a strong example of how Japanese equities can offer substantial returns in these economic conditions:

• Year-to-Date (YTD) 2024: 19.4% return.
• 1-Year: 23.7% return.
• 3-Year: 91.6% return.
• 5-Year: 160.7% return.
• Since Launch: A total return of 310.8% since 2005.

These figures highlight the potential of investing in Japan’s equity market. The fund’s top 10 holdings provide a glimpse into which sectors are thriving:

Top 10 holdings

Note: All stocks are listed on the Tokyo Stock Exchange (TYO).

1. Japan Post Holdings Co Ltd (6178) - Services: 4.6% of NAV.
2. ROHM Co Ltd (6963) - Electric Appliances: 4.4% of NAV.
3. Kyocera Corp (6971) - Electric Appliances: 4.3% of NAV.
4. Panasonic Corp (6752) - Electric Appliances: 4.0% of NAV.
5. Takeda Pharmaceutical Co Ltd (4502) - Pharmaceuticals: 3.4% of NAV.
6. Open House Co Ltd (3288) - Real Estate: 3.4% of NAV.
7. Mitsubishi Motors Corp (7211) - Transportation Equipment: 3.3% of NAV.
8. Nippon Telegraph and Telephone Corp (9432) - Information & Communication: 3.1% of NAV.
9. Seven & I Holdings Co Ltd (3382) - Retail Trade: 3.0% of NAV.
10. Japan Airlines Co Ltd (9201) - Air Transportation: 2.6% of NAV.

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The diversity of the fund’s holdings reflects the varied investment opportunities in Japan’s economy. Sectors like electric appliances, pharmaceuticals, real estate, and information and communication have shown strong performance. The recent interest in Seven & I Holdings due to corporate governance reforms also underscores how changes in market dynamics are opening up new opportunities for investors.

Geopolitical and Economic Outlook

Japan’s economic scenario is deeply influenced by global market trends and its relationship with the USD. The Yen's recent depreciation makes Japanese exports more attractive on the world stage. However, the future of Japan's economy is also tied to political outcomes, particularly in the U.S. The current discourse around the ACCC’s investigation into Coles and Woolworths in Australia highlights how corporate practices and government policies can have a ripple effect on economic health.

If a Kamala Harris-led U.S. administration implements policies like taxing unrealised capital gains, this could introduce further market volatility. In contrast, a Trump or RFK Jr. presidency focused on economic stabilisation might strengthen the USD, indirectly benefiting Japan's export-oriented companies. These geopolitical shifts will play a crucial role in shaping Japan's economic landscape.

Conclusion: Japan’s investment edge amidst global inflation

Experiencing Japan's cost-effective lifestyle and robust market sectors firsthand has solidified my belief that the country offers significant investment potential. Despite low wages for locals, the country's affordability, quality of life, and the current state of the Yen create an attractive market for foreign investors. Funds like the Arcus Japan Fund showcase how diversified investments in Japan's economy can yield impressive returns, especially when focusing on sectors aligned with domestic consumption, technology, and export markets.

While Australia grapples with inflation, influenced by factors such as corporate practices and government policies highlighted by the ACCC, Japan’s situation presents a stark contrast. With strategic investments, even on the highly popular and profitable side of companies like Pokemon, Nintendo, Sega, and Toyota, which we explored, Japan offers a promising opportunity for those looking to diversify and capitalise on a unique market dynamic shaped by its economic, cultural, and geopolitical landscape.

For those willing to look beyond the headlines, the land of the rising sun may be the next destination for long-term growth, especially if a Trump government comes to pass and the potential economic instability of a Harris-led administration can be avoided. Let’s see what November brings. In the meantime, I encourage you to take a "work-cation" and experience all that Japan has to offer.

Reference List:

Yen Crash and Economic Impact

• Yen trading at 34-year low: "Japan Yen Falls to Lowest Level in 34 Years," Bloomberg, April 2024.

• Bank of Japan interventions: "Bank of Japan Spends $62 Billion to Prop Up the Yen," Wall Street Journal, 2024.

• Japan’s ultra-loose monetary policy: "BoJ’s Negative Interest Rate Policy," Reuters, 2016-2024.

• Japan's purchasing of U.S. Treasury Bonds: "Japan Remains a Major Holder of U.S. Treasuries," U.S. Department of the Treasury, 2024.

• Impact on NASDAQ: "Nasdaq’s 15% Drop Amid Yen Depreciation," Bloomberg, 2024.

• Aging population statistics: "Japan's Demographic Shift and Aging Population," World Bank, 2024.

• Youth survey statistics: "Survey Finds Japanese Youth Concerned About the Future," Nippon Foundation, 2024: Nippon Foundation Survey.

• Grocery cost comparison: "Japan vs. Australia: Cost of Living," Numbeo, 2024.

• ACCC investigation into Coles and Woolworths: "ACCC Probes Coles and Woolworths Over Price Hikes," Australian Financial Review, 2024.

• Inflation pressures in Australia: "Australia's Inflation Trends," Reserve Bank of Australia, 2024.

• Japan’s food standards: "Japan's Rice Act of 1921," Japanese Ministry of Agriculture, Forestry and Fisheries.

• Robert F. Kennedy Jr.'s statement: Children's Health Defense speeches and interviews, 2023: Children's Health Defense.

• Healthcare spending data: "National Health Expenditure Data," Centers for Medicare & Medicaid Services (CMS), 2020-2024: CMS Data.

• Autism rates: "Autism Prevalence in the United States," Centers for Disease Control and Prevention (CDC), 2024.

• Disney’s revenue and net income: "Disney's Financial Summary," Yahoo Finance, 2023: Yahoo Finance - Disney.

• Disney’s content struggles: "Lucasfilm's Content Under Kathleen Kennedy," Variety, 2023.

• Disney's total debt: "Disney’s Debt Reaches $47.69 Billion," Yahoo Finance, 2023.

• Performance data: "Arcus Japan Fund Performance," Arcus Investment, 2024: Arcus Investment.

• Potential impacts of U.S. elections: "U.S. Elections and Global Market Impacts," Wall Street Journal, 2024.

• Japan's economic ties to the U.S.: "Japan's Economic Dependence on the U.S.," Nikkei Asia, 2024.