Some investors believe that Japanese companies have lost their global competitive edge, replaced by Korea and other rivals. However, there are newly emerging multinationals in Japan which offer real opportunity for growth. With the Japanese equity market now coming out of two decades of re-rating, we believe investors cannot afford to miss these very attractive opportunities.
Looking at the fall of the three well-known consumer electronics companies, Panasonic, Sharp and Sony, it may be tempting to conclude that Japanese companies have lost competitive edge to Korea and other exporters.
However, in our view the competitive position of these companies started to deteriorate in the 1980s and already by the 1990s they no longer represented Japanese industries’ prowess. Meanwhile other industries such as electronic components, auto and machinery industries have grown highly competitive and gained global market share.
Corporate finances have strengthened in the past two decades
Faced with a significant downward shift in domestic economic growth and the prospects of a shrinking domestic market, Japanese companies have significantly cut debt on their balance sheets in the last two decades. Companies now have an average debt to equity ratio of 0.5 times.
More importantly, Japanese companies have looked to overseas markets for growth. In 2004, approximately 70% of Japanese companies’ operating profits came from domestic business. Now, they make more than half of their profits overseas. They are also capturing the dynamic growth in the rest of Asia, with around 25 to 30% of their profits coming from the rest of the Asian region. We can find plenty of opportunities among the new multinationals...