2023 Tokyo Programs
INSIGHTS
2023 Executive Seminar • October 22-24, 2023
2023 Asia Pacific Roundtable • October 25-27, 2023
The Pacific Pension & Investment Institute (PPI) convened in Tokyo from October 22-27, 2023, to discuss the rapidly evolving economic and geopolitical trends in Japan and broader Asia. The Executive Seminar featured interactive conversations with Japanese business and policy leaders on corporate reforms, decarbonization, digital transformation, entrepreneurship, and domestic politics. Delegates visited a waste-to-clean energy center, the Yokogawa Electric Corporation, a neuroscience laboratory affiliated with Keio University, and the University of Tokyo’s research facilities for industrial science and advanced technologies. The Asia Pacific Roundtable discussions concerned security and sustainability in Japan and neighboring Asian economies. Members explored how the region adapts to new demographic, climate, macroeconomic, and geopolitical realities. They shared local and global perspectives on the business implications, investment opportunities, and challenges arising from these shifts.
The Inflationary Tipping Point and Multiple Transitions in the Japanese Economy
Japan is at a tipping point in its transition from a deflationary economy to a moderately inflationary one, setting the stage for private sector-led growth and wage increases. This inflationary growth occurs despite multiple concurrent headwinds in demographic change, technological disruption, and corporate sector transformation. The most acute are the rapidly shifting demographics: The population is aging, and the labor force is shrinking. Additional social factors, such as a low birth rate and low immigration, compound this challenge, which, even in isolation, would threaten economic growth.
These demographic changes occur during slow corporate and regulatory change. Because of cautious management and lifelong employment, the corporate sector is slow to adapt to changing demographics and consumer preferences. A current debate regarding the regulation and accessibility of ridesharing offers a microcosm of these issues. Younger urban residents are pushing for industry deregulation, but the powerful taxi lobby impedes the sector’s liberalization.
While seemingly contained within an industry, such conflicts often have knock-on social impacts and reinforce broader social malaise. Key to resolving Japan’s demographic challenges is boosting the birth rate.
Accordingly, burnishing perceptions of national progress and optimism of the next generation while showing political responsiveness to younger generations are necessary factors, in addition to economic subsidies for families. Similarly, the rise of new industries would boost the national innovation environment.
Of course, in addition to improving perceptions of the future, there are concrete policy steps that the government can take in parallel, which are necessary but only sufficient if coupled with the broader social change discussed above. These include greater inclusion in the workforce, raising the retirement age from 60 to 64, and reskilling policies to improve labor mobility.
Consolidation and Turnaround Investing in Japanese Legacy Businesses
The Japanese corporate sector has historically been characterized by conservative behavior in several respects. CEO leadership culture has often focused on preserving value rather than business expansion. Capital market activity in recent years has aligned with this approach, as Tokyo Stock Exchange-listed companies often use free cash flows to buy back shares rather than drive expansion or new investment. While international commentators have often noted that large Japanese corporations may become more profitable by spinning off non-core business units, such activity has been light in recent years.
Despite this background, technological advances may offer a catalyst to accelerate the transformation of corporate Japan, and this transformation can be observed in the automobile sector, which has historically generated about 10 percent of total employment and 20 percent of exports. Because of a focus on hydrogen fuel cells and gas-electric hybrid technology rather than the development of electric vehicles (EVs), Japanese automakers have broadly fallen behind in EV development. Japanese EV infrastructure also needs to catch up to other global markets. For example, Japan’s 29,000 EV charging points are vastly outnumbered by over 100,000 in the U.S. and 1.1 million in China.
Catching up with global competitors will require capital investment, partnerships with international players in the EV value chain, and new manufacturing approaches, all of which will catalyze transformation within Japan’s automotive sector.
Other economic and social trends are also impacting corporate behavior. Japan’s aging population is leading to labor shortages, and the COVID-19 pandemic has exacerbated this challenge. In response, Japan has opened immigration to skilled professionals in key sectors, which has led to political tension and pushback from local labor organizations.
Finally, private equity (PE) investment has driven corporate transformation in Japan. While the relative size of the PE industry is much smaller in Japan compared to the U.S. or Western Europe, PE has been successful in corporate turnarounds, particularly in the auto parts industry. It has also impacted the broader Japanese corporate world by allowing for divestment and rationalizing complex corporate networks. However, there is much room for further growth and the impact of private markets on Japanese corporate behavior.
Building Towards Energy Security and Sustainability
Japan’s energy mix relies heavily on imported fossil fuels, which presents challenges across all aspects of the energy trilemma: sustainability, access, and security. Japan has long relied on liquified natural gas (LNG) imports. Japan became the first importer of LNG in 1969 and remains the world’s largest importer of LNG, which is a challenge for both cost and security.
The Fukushima disaster forced the country’s nuclear industry to shut down and severely affected Japan’s energy mix. While nuclear power production has resumed, it makes up only about 6 percent of Japan’s electricity production, of which the bulk is generated from gas and coal. The Fukushima disaster’s impact on Japan’s energy strategy will be long-lasting, as the post-disaster shutdown of the nuclear industry led to a construction boom of gas and coal power generation, and many of the plants planned in the post-Fukushima period are just coming online now.
Though government policy has been strongly pro-renewable, Japan faces many challenges in decarbonizing the energy mix. Renewable energy subsidies in the 2010s led to significant solar development. However, only some feasible locations remain, and land constraints have rendered economic subsidies insufficient to drive further solar growth.
Japan has invested heavily in hydrogen ammonia as a potential renewable energy source, and the government is targeting 2 trillion yen per year in renewable energy spending, which is on par with Inflation Reduction Act spending in the United States.
However, hydrogen ammonia energy production costs remain far above commercially viable levels, and significant transport, storage, and safety concerns remain and require technical innovation, in addition to spending, to address.
Though long-term plans incorporate carbon reduction as a key policy goal, popular sentiment in Japan is not shaped by climate change as dramatically as in many other countries. Japan is not directly exposed to increasingly frequent climate-driven natural disasters, such as wildfires, drought, or typhoons. Consequently, while Japan aims to shift its energy mix to renewables, the technological, political, and economic hurdles are considerable.
Privatization and Partnership Opportunities in Japan’s Energy Sector
Japan’s challenges in balancing energy access, security, and sustainability are especially acute because of its market structure and the country’s pivot away from nuclear power. These challenges are complicated by the policy goal of achieving carbon neutrality by 2050.
Concerns arise from Japan’s reliance on global energy markets: Japan is only 12 percent self-sufficient and imports 88 percent of its energy. Even if long-term policy goals are achieved, Japan will still import 70 percent of its energy in 2050. Japan’s geography is poorly suited to solar and wind, increasing reliance on nuclear and new energy technologies.
While nuclear energy has historically been a significant element of Japan’s energy mix, the number of functioning nuclear plants declined from over 50 before the Fukushima accident to 12.
The narrative around nuclear power has become entangled in regional geopolitical tensions, which, along with divided domestic public opinion, have complicated plans to rebuild the nuclear industry.
The public and private sectors have promoted renewable energy and technological innovation, but both present challenges. Japan’s geography is not well suited to offshore wind, and limited land is available for solar development. On the technological side, while Japan has invested heavily in hydrogen ammonia power, high costs prohibit commercialization. Technologically-driven innovation on the demand side—including insulation, batteries, improved grid technology, etc.—may present the largest scale and nearest-term opportunities for savings.
Private Sector Opportunities in Decarbonization and Transition Finance
As economic policymakers in Japan transition from an era of deflation to a gradual and moderate inflation era, digital transformation (DX) and green transformation (GX) will be key focuses of government policy and spending. Recent legislation, including the GX Promotion Act and the GX Decarbonized Power Act, aims to reduce carbon emissions by 46 percent by 2030 and to achieve net zero by 2050. Issuance of GX Transition Bonds totaling 20 trillion yen, or USD 133 billion, will provide fiscal support to this effort.
New technologies, including hydrogen ammonia power, will be the root of this green transformation. Japanese industry aims to use hydrogen ammonia technology to reduce the carbon intensity of hard-to-abate industries, including steel production and automotive technology. The Ministry of Economy, Trade, and Industry (METI) is aware that supply chain concerns and geopolitical fragmentation threaten the electric vehicle sector, so it focuses on iodine battery technology, where much of the production is in Japan.
Japan is set to introduce carbon pricing, including an emissions trading system and a surcharge on fossil fuels. The emissions trading system will launch in 2026, and a carbon auction mechanism for the power sector will be introduced in 2033.
Japan views decarbonization across the region as crucial to meeting global climate goals and is actively leading decarbonization efforts in Asia through the Asia Zero Emissions Community (AZEC) and Asia Energy Transition Initiative (AETI). Transition finance is vital for the region’s energy transition and a boon for Japan’s corporate sector, which is coalescing support globally for this effort.
Corporate Governance in Japan and Reforms at the Tokyo Stock Exchange
In Japan, corporate boards and governance practices have historically aligned with management’s interests. There are corporate culture and legal roots to this, as fiduciary duty in Japan is defined as the director’s duty to the company rather than to shareholders, as it is in the U.S. and other markets. Frequently, boards in Japan were wholly composed of corporate insiders, and independent directors were rare.
In response, the Japan Exchange Group (JPX), policymakers, and investors are attempting to implement a series of governance reforms to align shareholder and management financial outcomes better. Key focuses have included adjusting listing requirements to fit guidelines for improved disclosures, Task Force on Climate-Related Financial Disclosures (TCFD) reporting, and increased diversity of management and the board.
JPX guidelines and the stewardship code are based on a “comply or explain” approach. JPX is working to engage investors within Japan and globally to support corporate governance reforms. In 2022, 97 percent of companies listed in JPX’s prime market, the segment with the most stringent listing guidelines, disclosed financial statements in English, up from 79 percent two years prior. However, English reporting may lag reporting in Japanese. The Stewardship Code, implemented in 2014 and backed by 100 companies, has generated significant additional momentum, with 329 companies and 82 pensions now supporting it. However, Japanese corporate pensions generally do not engage actively in stewardship.
Taken as a whole, this set of reforms aims to nudge management behaviors to consider increased risk-taking, improved capital efficiency, and better return on equity, though ultimately, investors will provide the most meaningful feedback on the success of these initiatives via their investment decisions.
Governance and Engagement in Japan and Korea
Activist shareholders are a key part of the public equity landscape in both Japan and South Korea. While the activist and investor stewardship conversation began in Japan several years before the rise of shareholder activism in Korea, both countries follow similar trajectories.
Major corporations in both Japan and Korea have historically been managed and governed by insiders rather than independent directors. However, in Korea, many conglomerates, or chaebols, are family businesses, while in Japan, entrenched and long-tenured management teams are more common. Incentives between management and shareholders in both countries may need to be aligned. In Japan, executive compensation focuses on base salary rather than compensation linked to share price, and tenure often outweighs performance considerations in compensation decisions. Distortions in the Korean market can be driven by family incentives around generational wealth transfer, which may directly conflict with maximizing share price.
Foreign index investors have a significant presence in both markets. While such investors engage in stewardship activities, including promoting new stewardship codes and principle-based governance improvements, the need for large, active, long-term shareholders has opened the door to local and foreign activist investors. Local activists may have some advantages in obtaining better CEO access, as even the most significant foreign shareholders struggle to access corporate management and directors in Japan. However, it’s not clear that foreign activists are at a disadvantage, as they have succeeded in raising large Japan- and Korea-focused funds in recent years.
Promoting Entrepreneurship in Japan
The Japanese government has launched new policies to promote entrepreneurship and venture capital investment in Japan. Efforts include a five-year plan to support entrepreneurship, which the influential Japan Business Federation (Keidanren) endorsed. The plan includes a host of educational, taxation, visa, financing, and other incentives to support local entrepreneurs and to attract investment into entrepreneurial ventures. A key aspect of this plan has been to reform the regulation of stock option compensation for executives so that founders and executives of startups can be more highly incentivized.
Previously, venture capital has not played a significant role in Japan’s startup ecosystem, as the Japanese market has emphasized corporate venture capital rather than independent venture capital firms. However, the venture landscape is growing quickly, both in quantity and quality of firms.
A critical test will be whether Japanese venture capital firms can attract significant foreign capital, which will be needed to fund later, more capital-intensive stages of corporate growth.
The rise of venture-backed startups in Japan also benefits diversity in the corporate landscape and tapping previously overlooked sources of talent. While the representation of women in the Japanese venture capital industry is low, startups are more gender diverse. Thirty-eight percent of startups have women in the C-suite. In contrast, of Japan’s 4,000 listed companies, just 14 are led by women.
Owning Real Estate in Japan as a Foreign Institutional Investor
Many investors are bullish about investing in Japanese real estate. Underlying long-term fundamentals, including a mature market, favorable regulation, and political stability, support this optimism. Good short- and medium-term dynamics have further enhanced these fundamentals in recent years.
Japan’s real estate market is large, and the financing system is mature, providing investors access to leverage and liquidity. Multiple asset classes in Japan are already institutionalized and accessible to foreign investors, including multi-family residential, office, hospitality, and logistics. Unlike many American and European markets, Japan’s office-based work culture has remained strong, and Japanese office investments have proven resilient. Tokyo’s office vacancy rate is 5 percent, lower than most other global cities.
Market dynamics are currently favorable and enhance this underlying stability. The yen’s valuation is now attractive for foreign investors, and hedging to the U.S. dollar is cheap and generates positive carry, further enhancing returns. Local institutional investors are also increasingly making larger allocations to domestic real estate as they diversify historically conservative portfolios into alternatives.
Seventy percent of transactions this year were funded with domestic money, reflecting these increases, though significant new foreign capital is also entering the market.
When considering future allocation decisions, investors are primarily focused on hospitality investments, as they provide a greater level of inflation protection because of the ability to adjust rates more rapidly, in contrast to less flexible long-term leases in other real estate asset classes. Investors have also focused on data centers, as the Japanese data center market may benefit from geopolitical tension in Asia: more data center capabilities will need to be built to serve the local market as it separates from larger neighbors.
Finally, Japan is perceived as being very open to entry by sovereign and other foreign investors, and the mature market and large number of existing REITs offer plentiful exit options to foreign investors, easing both entry and exit of real estate investments.
Understanding the Current Political Dynamics in Japan
Japan’s political system is embedded and greatly influenced by ongoing demographic, economic, and regional challenges. Just as an aging population, slow economic growth, and population decline provide a background for Japan’s economy, these trends also impact the political system. Political engagement among the youth is low, and only 13 percent of Japanese 18-year-olds believe the outlook for the country is positive, with many feeling that Japan is decaying economically and socially.
Correspondingly, aspects of the political system feel stagnant. Dynastic political families dominate political leadership, and few districts allow for the open recruitment of candidates. Only 10 percent of the members of the House of Representatives, Japan’s lower house of parliament, are female, one of the lowest rates of female representation in the world.
To counter this malaise, new political candidates are entering elections, running on messages of increased gender diversity, and aiming to address Japan’s demographic challenges. However, these topics are politically fraught, as potential solutions, such as immigration to resolve labor shortages or nuclear power to reduce the high cost of energy, are divisive.
Japan also faces an urban-rural divide, accentuated by changing demographic patterns. Voter turnout is higher among older people than the general population. As the rural population declines and ages more rapidly than the urban population, the demographic shift plays out in the electorate magnified, making new political entrants from non-traditional backgrounds even less likely to succeed in many districts.
The Evolving National Security Conversation in Japan
In the face of an evolving geopolitical landscape, Japan aims to strengthen its political and military position in Asia. Prime Minister Kishida’s administration views the potential Chinese invasion of Taiwan as a real possibility and further believes such a move would constitute a strategic threat to Japan. Consequently, the administration has worked to ensure political and popular support for defense spending, which has remained strong ever since Russia invaded Ukraine in 2022.
Japan’s growing role in regional leadership during current instability is the culmination of a multi-year policy pivot. The Abe administration envisioned Japan as a leader of the democratic world and consequently reinterpreted Article 9 of Japan’s Constitution, which has historically limited military capabilities to self-defense. Following this change, Japan assumed a more assertive military posture to fulfill this role. It also coincided with a shift in Japan’s domestic political landscape, in which leftist parties have distanced themselves from prior affinities for global socialist powers.
Previously, fiscal concerns may have constrained Japan’s ability to strengthen its military. Still, the new doctrine of regional leadership, coupled with an increasing threat from China, has enabled the government to raise the consumption tax twice since the start of the Abe administration, which has funded higher military expenditure. Japan has now explicitly targeted military spending at 2 percent of GDP, which would align with the North Atlantic Treaty Organization’s (NATO) targets for member countries.
A New Era in U.S.-Japan Economic Cooperation
Economic and strategic cooperation between the U.S. and Japan has been long-standing and based on shared democratic values and economic interests. As the world enters a period of increased geopolitical fragmentation, the business, economic, and cultural cooperation between the two countries will be critical to mutual success.
Previously, bilateral and multilateral agreements have reinforced geopolitical and economic interests between the two countries. The failure of the Trans-Pacific Partnership shifted the emphasis of the bilateral relationship from trade agreements to more ad hoc collaboration. The countries have much to build on, as Japan is the largest foreign direct investor in the U.S., and the U.S. is among the largest investors in Japan. Ties between cultural institutions are also significant, as they promote the bilateral relationship and are increasingly focused on strategic sectors, such as research partnerships between Japanese and American universities in artificial intelligence.
Bilateral cooperation will increasingly become strategically important, as Japan’s corporations constitute key links in global supply chains, particularly in semiconductors. Because of Japan’s industrial base and aging demographics, Japan is or is positioned to become a leader in sectors that will become strategic to the U.S. as its population ages, including robotics, medical devices, and pharmaceuticals.
Asia’s Economic Past, Present, and Future
The economic center of Asia is shifting. In 1990, Japan was the region’s economic leader, with a per capita GDP three to four times that of South Korea and Taiwan. South Korea and Taiwan have grown rapidly in the following decades, and their per capita GDPs are now roughly on par with Japan’s. They also remain on faster growth trajectories than Japan, where growth stagnates. Further down the income ladder, Malaysia and China are close to becoming high-income countries with a per capita income of around 13,000 USD. India’s per capita GDP substantially lags that of other large Asian economies, at about 3,000 USD, though it is growing more rapidly at 6-7 percent annually.
Because of these divergent growth rates and income levels, the economic center of Asia is shifting south and east, as South Asia and Southeast Asia’s demographics and other economic factors drive more rapid growth. In contrast, the IMF predicts that China’s economic growth rate will decline to 3 percent by 2030 because of unfavorable demographics and geopolitics.
Geopolitical uncertainties lead to economic fragmentation, further altering growth prospects and trading relationships. Western economies are decoupling from China, and this pivot will play out over the next several years. Counterintuitively, geopolitical tensions across the Taiwan Strait may increase Japan’s attractiveness as an investment destination.
Demographic factors may also weigh on growth as the working-age populations of Japan, South Korea, Taiwan, and China decline and will continue to do so over the coming decades. Regarding climate change, economists have no consensus on whether it will harm Asia’s growth because of the cost of transition or support growth because of anticipated adaptive and mitigation investments. Higher-income Asia is exposed to climate change risk because of higher per capita carbon emissions. In contrast, emissions remain lower across South and Southeast Asia (excluding Malaysia, a petroleum exporter), making carbon emission mitigation less impactful economically.
Japan’s Role in Emerging Asia
In recent years, Japan has engaged proactively in economic diplomacy to address global challenges, such as climate change and geopolitical fragmentation, and to support Japanese economic goals and the objectives of Japan’s G7 presidency. The Japan Bank for International Cooperation (JBIC) has led this economic policy effort.
JBIC has invested heavily in hydrogen ammonia and other renewable power sources to address climate change. While ammonia presents supply and transport challenges, building a new supply chain and market is possible. Developing ammonia as a renewable energy supply has helped support enhanced cooperation between Japan and South Korea, as both are significant LNG importers and seek to diversify their energy mixes and reduce dependence on volatile global markets.
These investments have occurred in a dynamic geopolitical context. Capital outflow from China because of geopolitical tension with the West has led to increased investment in Japanese industries and an opportunity to expand Japanese businesses across Asia. The Japanese corporate sector is investing heavily in key allies, and deepening partnerships involving Japanese steel producers in the Indian market provides an example of such cooperation. In the face of a potential U.S. retreat from Asia, given political uncertainty with the 2024 U.S. election, Japan has also seized an opportunity to demonstrate leadership by investing across Southeast Asia, focusing on decarbonization in Vietnam and Indonesia.
Digital Infrastructure in the Current Macro Environment
A Free and Open Indo-Pacific (FOIP) is Japan's key foreign policy pillar. Digital infrastructure development and public and private collaboration to develop infrastructure across Asia are essential tools to drive this policy, as they build on Japan’s commercial strengths and contribute to the region’s sustainable growth.
In 2013, Japan launched a policy to build digital infrastructure across South and Southeast Asia. Public-private cooperation has been vital given the profound social integration of infrastructure and investment externalities. Japan’s Fund Corporation for the Overseas Development of Japan’s ICT and Postal Services (JICT) has led several aspects of investments.
JICT has contributed expertise on integrating Sustainable Development Goals (SDGs) as Japanese corporations invest in digital infrastructure globally. The importance of SDG integration is amplified given the geopolitical implications of digital infrastructure buildout and U.S.-China competition in 5G infrastructure. JICT has also helped reduce currency risk for digital infrastructure investments abroad, as the yen fluctuates in the face of currency volatility.
Sizing up Risk and Reward in Asian Markets (Ex-Japan)
Following recent turmoil in Chinese markets, investors are looking for a bottom. Concerns persist about the real estate market and the potential resurgence of COVID-19 restrictions. Geopolitics also influences behavior and the economic outlook more prominently than before.
However, it is essential not to overestimate the turmoil in China. There has been much less economic stimulus in China compared to the U.S., where total stimulus reached about 25 percent of GDP. Additionally, the information flow out of China is a risk, as negative headlines may overshadow continued, robust business relationships between China and the U.S. Key industries that remain resilient during this downturn include those tied to China’s dominance in global value chains. iPhone manufacturing is one example, and even if some production is shifting away, the vast majority of the phone is still manufactured in China, and the value chains will remain China-centric.
Solid policy support remains for continued economic growth in China. Such growth, and eventually becoming the largest economy globally, is a clear ambition of Chinese policymakers. There is sufficient strength in China’s track record of growth over the past several decades, and we should take that policy ambition seriously. China’s consumer market remains the largest in the world, and China’s high-income population exceeds 150 million, more significant than the population of Japan.
From the perspective of future investment, the valuations of Chinese equities are very low and the cheapest of any major economy. Despite the turmoil, China’s growth outlook is more favorable than much of the world's. Key investor focuses include the electric vehicle supply chain, industrial automation, and the global expansion of Chinese businesses. At the same time, geopolitical risks are associated with sensitive sectors such as semiconductors; an investor can build a diversified portfolio while avoiding geopolitically fraught assets.
Some investors attempt to sidestep Chinese geopolitical risk by investing across Southeast Asia. However, this investment does not entirely remove the risk, as such an investment could be viewed not as removing China risk but as building a more complex supply chain that includes China. Despite increasing complexity and geopolitical tensions, many investors remain long-term bullish on China.
A Robust Policy Portfolio for Uncertain Times
Japan’s Government Pension Investment Fund (GPIF) is one of the largest investors in the world. GPIF’s size and long-term investment horizon give it unique exposure and potential benefits to policy and corporate engagement on sustainability and governance issues. GPIF has gradually been increasing its risk-return profile and globalizing its investment portfolio. Currently, 50 percent of GPIF is invested outside of Japan, leaving GPIF the most prominent asset owner in Japanese equity markets and a significant player globally.
GPIF actively considers environmental, social, and governance (ESG) factors in investment decisions because it believes ESG reduces investment risk. Consequently, ESG has become a necessary analytical framework and part of their fiduciary duty. GPIF has invested 12.5 trillion yen in passive ESG equity funds and 9 trillion yen in ESG bond funds.
While the EU has become a de facto global standard setter because of the bloc’s proactive rulemaking, the Japanese perspective on ESG is unique and differs from those in the U.S. and Europe. Because some governance practices in Japan lag standards in other markets, corporate disclosure and engagement are key ESG focuses for GPIF within Japan. The Sharpe Ratio of GPIF’s ESG investments has slightly outperformed their benchmark, at 0.39 to 0.37, further substantiating the ESG investment case.
Over time, as a long-term universal owner, GPIF’s attention to ESG will increase. GPIF can gain valuable data via engagement with asset managers and monitor price dynamics across the universal portfolio. From a risk perspective, as a long-term universal owner, GPIF is exposed to non-traditional risks like demographics, climate, and technology risks, incentivizing close attention to emerging ESG factors.
Asset Owner Perspectives
Japan features more prominently on the asset allocator’s map again. However, in many ways, the current Japanese investment thesis rehashes the value proposition that the Japanese market was expected to feature two decades ago: improving corporate governance, the rise of activist investors, and a safe-haven currency and market in times of geopolitical uncertainty. Investors asked if there is a catalyst to Japan’s growth this time around—technology, social change, corporate transformation, or international partnership—that is somehow markedly different than in previous eras.
The global context for the Japan thesis this time around is different. While supply chains and capital flows are more globalized than ever, geopolitical divides between China and the U.S. are more tangible. Investors respond to this complexity by building out China-only and Japan-only exposures rather than approaching East Asia as a singular region. There is a much-hyped promise of technological advancement in renewable power and the automotive industry, but when and if those new technologies will arrive is still being determined.
There is also additional complexity within Japan as the country copes with demographic change, labor shortage, and digital and green transformations.
Investors noted examples of greater gender diversity and the correlation between improved workforce inclusion and economic innovation. However, the examples of women succeeding and leading businesses in Japan remain few and far between.
Overarching global themes also colored CEO and CIO perspectives. Investors noted a shift in tone and priority. While sustainability used to be the primary discussion point on many investment topics and assets—food, power, transportation, supply chains, etc.—security has replaced sustainability as the primary concern. Despite the shift, ESG and sustainability remain integrated with key business considerations: marketing, talent retention, value creation, and the selection of business partners. Uncertainty around monetary policy and other macroeconomic factors, however, remains prominent.
To address security and sustainability considerations and broader underlying economic and social factors, policymakers and investors are pinning their hopes on rapid technological and societal advancements, both of which remain uncertain.