BlackRock Investment Institute

Asia insights

Japan through the lens of mega forces

Japan faces a blend of opportunities and challenges from the mega forces we see shaping investment returns now and in the future. It is at the forefront of grappling with some – such as demographic divergence – and is at the crosscurrents of others such as digital disruption and artificial intelligence, the low-carbon transition and geopolitical fragmentation. We think understanding how Japan’s economic revival dovetails with the far-reaching impact of these mega forces will be key to harnessing granular, sectoral investment opportunities.

Take demographics. Japan’s aging population and shrinking workforce has been well documented. It is the world’s oldest population, with a median age above 48 years compared to the global average of 30 years, according to 2022 United Nations World Population Prospects. The government expects Japan will have one elderly person for every working-age individual by 2060. Japan's shrinking labor force has contributed to economic stagnation - exacerbated by the bursting of the asset price bubble of the late 1980s.

Yet markets have been slow to price these structural shifts. Over the last three decades, the value of Japan’s healthcare stocks relative to the broader market have risen broadly in step with the growth of its retired population, as measured by the dependency ratio – evidence that structural shifts are not always priced by markets, even if they can be anticipated years in advance. See the chart below. With the dependency ratio expected to rise further, we think the healthcare sector can keep outperforming.

Countering the impact of demographic challenges is also compelling Japanese authorities to place a strong emphasis on productivity gains via technological innovation, ongoing corporate governance reforms and a focus on revitalizing domestic industry. Japan’s deployment of industrial robotics - a proxy for automation adoption – puts the country fourth in the world in terms of robot density in manufacturing, according to the latest data from the International Federation of Robotics.

So far, installations are most prevalent in manufacturing sectors such as electronics and automotive industries. But closely tied to its aging population are Japan’s efforts in deploying advanced technologies in healthcare. That includes surgical robots and the use of AI in drug discovery.

Capital spending to harness mega forces

The latest Development Bank of Japan (DBJ) survey of major Japanese firms pointed to a second consecutive increase in planned domestic capital spending for the fiscal year ending 2023 of 20.7%, surpassing the pre-pandemic levels. These spending plans lean towards digitization (particularly in decarbonization initiatives and railways), semiconductors supply chain and electric vehicles according to the survey, reflecting how a capital spending revival intertwines with mega forces.

These spending plans reflect how Japan – like other countries - is not alone in looking to strengthen control over supply chains and insulate from risks of geopolitical fragmentation. Subsidies for domestic chip foundry ventures reflect Japan’s push to rebuild the country's chip manufacturing base though it has a way to go to catch up with regional players like South Korea and Taiwan.

Japan’s efforts to decarbonize are also closely linked to bolstering energy security in a world of geopolitical fragmentation. Japan’s historical focus and leadership on energy efficiency have driven down its energy intensity per unit of GDP around 30% from 2000 to 2020, per the International Energy Agency’s May 2021 report. The country has targets to reduce greenhouse gas emissions by 46% by 2030, achieve net zero by 2050 and plans to ramp up nuclear power back up to 20-22% of electricity generation by 2030 from about 6% now, according to its New Basic Energy Plan. That points to an infrastructure spending surge that could provide investment opportunities, in our view.

The bottom line: We remain tactically overweight Japanese equities on bright fundamentals and the relatively benign macro backdrop. On a longer horizon, we see the mega forces at play creating compelling sectoral opportunities in Japan that augur well for a more active investment approach than in the past. We favor an above-benchmark allocation to Japan over a strategic horizon (for professional investors).

Ben Powell
APAC Chief Investment Strategist
Read bio
Yuichi Chiguchi
Head of Multi-Asset Strategies & Solutions and Chief Investment Strategist in Japan

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