Frustration at the weak yen
It’s no surprise that Japan is changing: geo-politics has meant that it doesn’t really have an alternative. It may be interesting to give my reflections on three weeks spent there recently, both more generally and from an investor’s perspective.
Almost every one I spoke to asked me when ‘en yasu’ i.e., the weak yen was going to change. It has led to an influx of tourists: nearly 37m visits in 2024, or about 30% of Japan’s population. 78% of these come from ten SE Asian countries, with Korea, China, and Taiwan the top three. Only the United States (no 4) and Australia (no 7) break into these top ten.
Fun fact: not so many Brits visit Japan, but we spend more per visit than any other country, more than two thirds more than the average. The Australians and Spanish come next.
There is also frustration that going abroad has become prohibitively expensive for all bar the very few. With the exception of the COVID lock-down years, the number of Japanese making overseas trips remains the lowest since 1989, the peak of their ‘bubble’.
Bank of Japan under pressure to raise rates faster
I conclude from this that politicians, however weak they may be, will put pressure on the Bank of Japan to raise interest rates to more ‘normal’ levels to encourage some currency appreciation. The BoJ’s concern will be that the country does not fall back into deflation, which is why they have been slow to raise rates. However, another complaint I heard regularly was that food prices are going up faster than wages. In the absence of wage rises, the BoJ will also be under pressure from politicians to keep inflation down.
I could not give much comfort to those I spoke to on ‘en yasu’. All I could say was that at some point the yen will strengthen again, because on any purchasing parity basis Japan seems very cheap indeed. The authorities will on the other hand also need to consider the exchange rate with the Chinese yuan, because of the impact which a devaluation by China would have on the Japanese economy. While the case for a stronger yen is there, I could not put a timescale on when it might happen.
A significantly stronger yen would have repercussions in financial markets. A lot of financing is being done in JPY, and Japanese pension funds have had an easy carry trade for several years now, being short JPY and long USD and making 4%. Unwinding that will more than likely uncover some naked swimmers (to use Warren Buffett’s famous aphorism).
Legacy of the 2021 Olympics
I was also struck by the legacy of the 2021 Olympics. While they may not have been a success in themselves, they have made Japan more accessible. The obvious evidence is the signage of most transport (e.g., trains and buses) in four languages: Japanese, Chinese, Korean, and English. Major tourist sites did the same, but museums, even the national ones in Tokyo, usually only had limited non-Japanese explanations.
However, Google helps the tourist get round that. The top tip for any traveller to Japan is to use Google Maps to get around – it and the multi-language signage make using buses in Tokyo and Kyoto, which were previously almost inaccessible to non-Japanese speakers, easy. I also saw an enterprising tourist using Google Translate to translate the Japanese descriptions in a museum into Italian.
A less obvious legacy is the far greater acceptance of larger suitcases, buggies, etc in buses and trains. Ten years ago, the standard was to send any suitcase beyond a very small one by delivery service, and to carry babies and toddlers (or make the latter walk). Now, strollers and bags of almost any dimension on the subway are just normal.
Japan’s falling population
Which brings me on to demographics. Japan’s population has started to fall from its peak of around 128m in 2010, but only gradually. The real demographic impact on the economy comes from the rise in those no longer economically active through very old age, despite the considerable efforts to keep the not quite so old in employment. The total population is expected to fall to 100m over the next 20 years, by which time the number of 16-64 year olds will be only 50m. The shortfall will have to be made up by those over the age of 65 and/or by immigration.
The impact is seen most in the service industry: some functions are automated; others are almost universally done by those of retirement age or by immigrants. For example, the famous midoriguchi (or green windows) at stations, which in the old days would have been manned by highly efficient staff, are now unmanned except at large stations. There is a facility to speak to an operator by video, and for one particularly complicated transaction we had, we were able to rope in one of the ticket collectors to help us.
Taxi drivers (yes, we took a few) were almost universally over 70 years old; and one of the best experiences we had was being shown round the oldest original kabuki theatre in Japan, Kompiraza, in Kotohira in Shikoku. Our guide was of retirement age, but wonderfully knowledgeable and enthusiastic.
But the young are spending
However, the surprising aspect of the demographics was that the crowds in Tokyo and, to a lesser extent Kyoto, were young. Ueno Park and the museums were as crowded as I have ever known them to be, the subway and most buses were often standing room only, and the streams of people at Hachiko in Shibuya were unchanged. But the crowds were young – we felt our ages.
Some of the general crowds were undoubtedly tourists, but it was young Japanese who manned (by Western standards I would say over-manned, despite the drive to automation) the shops and to a lesser extent the restaurants. Even the less glamorous jobs at hotels – cleaners, for example – were still being done by Japanese. However, the chorus of bellhops who at major Tokyo hotels used in carefully enunciated English to wish guests ‘good morning’ as they emerged from the lift in the morning have now disappeared.
In many cases, I wondered how the shops made a living, as however delightful, the shops didn’t seem to have many customers. That went from the gorgeous sembe shop in Kyoto pictured above to the tiny coffee stand off Aoyama-itchome.
The answer may be that the owners or young staff live with their parents, because the cost of renting or buying in Tokyo is high, due to both Chinese investors and an increase in the cost of construction. We were told several times that there is nothing available to buy at less than ichi oku en (approx. £530,000 or USD 660,000).
Living with parents means the cost of living is low. Despite the grumbles about food prices rising, restaurants in Japan remain affordable and – of course – almost always delicious, and public transport within cities is efficient and cheap, about one third of the price of London’s.
I noticed a greater willingness for young people to work in start-ups or smaller businesses rather than for large companies. That may be due to with not wanting to become salarymen like their fathers.
Could change happen quicker?
One of the reasons Japan works so well has always been the attention to detail by everyone concerned. That is why trains generally run to time, and our flight from Haneda lifted off from the runway almost to the minute of scheduled departure. However, there are some signs of fraying at the edges. Two of the five shinkansen trains we took were delayed, one seriously; we managed to have some less appetising meals as well as some glorious ones; the steps down the entrance to Aoyama-itchome station weren’t swept in several days.
Japan is as ever a wonderful place for tourists to visit. In three weeks we went to 30 different places, in most cases not major tourist sites. They included temples, gardens, houses, museums, and the kabuki theatre. Perhaps the highlight was the Tei-en Museum in Shiroganedai in Tokyo. It is the home of temporary exhibitions, but go there for the architecture and decoration of the house. It was built in 1933 as the residence of Prince Asaka (a junior member of the Imperial Family) in the art deco style, and apart from some of the wallpaper, remains almost unchanged as a spectacular example of Art Deco at its best.
From an investment perspective, I picked up a groundswell of resentment among Japanese about the politics. En-yasu was one part, but frustration at real wages falling, being overwhelmed by tourists and the price of property in Tokyo were also evident. Apart from the weak yen, Japan is not alone in these complaints and Japanese people are famously patient, but when change does come it may come suddenly.
A key dynamic in Japan is the growing interest both from foreign companies and private equity in buying domestic Japanese companies. My friends at Arcus Investments point out that the pace of corporate activity has picked up in the last few months, and that the deals are now between much larger companies. Seven & I and Nissan, at least until it collapsed, are two high profile examples. A stronger yen would make both the pricing and JPY financing less attractive.
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