2012 – A Challenging Year
Friday, January 6th, 2012I wish you all a Happy New Year! 皆さん明けましておめでとうございます。
What kind of year will be 2012 for Japan?
2012 – A challenging year
Despite the small depreciation of JPY in the last months, it still remains too strong to be internationally attractive. Auto industry, machinery etc. will suffer enormously as nobody will buy JPY domestically- manufactured products.
In many industries, the domestic market is oversaturated and Japan’s demography is shrinking. Domestic companies therefore need to find additional buyers beyond their existing customers at home. If they do not do so, they will face increasing pressure from their competitors. In order to compete effectively, more investment is needed in sales & marketing and R&D for development of more innovative products etc. Automatically, operating margins are getting lower and tighter for many Japanese companies who have a solely domestic play.
In addition, the number of people older than 65 will be more than a third of the population by 2020 according to the Ministry of Health, Labour and Welfare. This means less people contributing to the improvement or even the maintenance of status quo of the GDP -also on a per capita basis. (The majority of older people live on their hard earned pension money, which they allocate strategically. They will not be excessively spending.)
There is also a reduction in the number of children being born. Even with the Japanese government incentive based on the German model of “Kindergeld”, the so called Kodomokin Teate “子供金手当て”, a government payment for having children available to Japanese legal residents, there has not been much increase in birthrate. Macroeconomists argue that it takes a few years until there is true effect since implementation but there are also questions regarding the value of such an incentive especially there are other barriers to increasing childbirth rates e.g. a lack of available Hoikuen “保育園” (pre-school childcare) places, making it difficult for women particularly to combine child-rearing with their career.
Overall, looking at these facts, a budget deficit might occur sooner or later. Public sector costs, especially in health etc. need to be reduced. The government needs to take an aggressive stance on this.
For example, in the pharma market, the distribution volume of generics in Japan needs to go by far beyond the target of 30% by the end of this year, as set by the Ministry of Health, Labour and Wealth. It is certain that foreign companies will tap into the JP pharma market more strongly in order to capture this strategic expansion opportunity. A good strategy is to combine such a move with a similar effort in China as the Chinese government has approved a generous healthcare system improvement program of 680bln RMB. The proximity and the similar ethnicity should allow global healthcare providers to leverage synergies in these two markets in a timely and closely managed action.
As most macroeconomists agree, a solution to shrinking demography and aging population with the consequent decrease in working age people is easing immigration. Japan has made one step in this direction, but only on the expert level, a move which is definitely needed as, in the current environment, ‘expert’ level professionals are actually leaving Japan, mainly to the US – the so called “Japan experts’ exodus”.
Though the experts’ immigration will hopefully increase innovation, intellectual property – increasing the overall value of IP produced in Japan globally according to IPALPHA – and introduce high quality human capital to the Japan market, it is likely just a fraction of what is needed to solve the current demographic and macroeconomic problems. A more aggressive and wide-ranging policy is needed as soon as possible.
Getting back to the manufacturing industry, except for highly sophisticated e.g. civil engineering projects, other product industries will find it very difficult to be competitive if domestic goods need to be sold abroad. Rather staying national, companies have to make serious efforts to become more international by moving more abroad and shifting the manufacturing process overseas. Some moves in this direction have been seen, such as by Elpida to Taiwan which was definitely a wise thing to do. However, JP companies who have not started doing so will remain unattractive unless they are able to develop innovations, which becomes nationally or internationally a de facto standard.
Investments in Japan? Definitely a lot of opportunities in HF and VC industries; however PE might be more conservative.
HFs
Especially for hedge funds with focus on event driven strategies, risk arb/merger arbitrage, long-short strategies, long-only, fundamentals only, etc. Even pair-trades might be interesting. The opportunities depend on the individual fund.
Just a quick glance over the overall HF performance last year globally:
On average HF fell 4.1% last year, the second-worst performance so far, according to Eurekahedge. Most of the losses were suffered in the second half, and hit smaller hedge funds the hardest with several redemption calls, extreme losses in particular from August to October.
In contrast, the Mizuho-Eurekahedge Top-100 Index actually rose 2% in 2011, while the Standard & Poor’s 500 Index finish almost perfectly flat. Fixed income hedge funds did best on the year, returning 1.5%, while arbitrage funds added 0.6%.
Geographically looking, Latin America was the place to be, with regionally specialized funds bringing back 2%. In contrast, funds in North America have lost 0.8%.
Hedge funds took in USD 67bn in new money, which is USD 1bn more than in a by far more successful 2010. The industry size rose to USD 1.72tn. It was also the second-highest number of new launches of new HFs in its history. (Source: FINalternatives)
Venture Capital:
This area might be very interesting as there are an increasing number of startup companies and competitions being organized in Japan. Interestingly, DFJ is looking into Japan.
IT students sometimes take on the challenge of moving to the US in order to try and establish themselves in Silicon Valley which, according to many such entrepreneurs has a superior infrastructure and environment for IT when compared to Japan. Japan should make further efforts to keep them in the country.
PE funds:
Many of the big PE players such as Blackstone, KKR, etc. are represented in Japan.
One way to assess the strengths of the PE industry in a country is by looking at the presence of the management team of renowned PE firms. For example, if you look at KKR, Japan is the only country without a Partner. Also, Permira who was about to wrap up and did a kind of last minute LBO transaction in 2008 has not promoted even veteran investment professionals to Principals, Managing Directors or even higher.
So what might be the takeaway? PE wise, Japan will remain a tough market.
With respect to Carlyle, who has brought in a new Co-Head, it is difficult to read what their funds’ strategy will be.
IP funds/transactions:
According to IPALPHA, M&A transactions motivated by intellectual property will definitely increase especially in the industries such as semiconductor, 3-D TV, touch screen, LCD, mobile telecommunication, healthcare, esp. original manufacturers running out of IP protection in their product mix, generics, and medical devices –Japanese medical device companies seek more foreign help as the approval time and hurdles in Japan are getting more and more difficult- . Those transactions will be mostly cross-border.