Q2 - what happened in Japan?

Good morning, a little break from our usual company write-ups this week. But here is a quick bird’s eye view of what has been happening in the overall Japanese market over the past quarter. It is hard to believe that we are half way through 2021, especially as the painfully slow vaccine rollout in Japan still seems to be trapping us in 2020. The Tokyo 2020 Olympics are less than a month away and Japan will be basking in the warm glow of the world’s media spotlight…or not. Thanks for your suggestions on which companies to take a look at going forward and helping us to grow the universe of Japan’s most interesting, innovative and disruptive companies. ❤️🇯🇵

After a strong start to the year for Japanese shares in Q1 (Topix +8.3%), Q2 was less impressive (-0.9%). Earlier in the year, higher interest rates resulted in a rapid shift away from growth stocks and towards value stocks. In Q2, even though Japanese bond yields reversed lower, the same sectors continued to perform - shippers (+38%) and rubber (+15%). We break out the big winners and losers in the following chart:

In terms of individual companies, not surprisingly, shippers were the stars of the show, benefitting from higher freight rates globally. However, not all inflation-related stocks performed well; Pacific Metals, Mitsui Mining, and Toho Zinc were notable sell-offs. 

Nippon Nuggets readers will be more interested in the Japan Disruption and Innovation index. There is, as usual, a large divergence in performance among small cap growth stocks. DX plays like Money Forward, BayCurrent, and Rakus were the standouts. For Money Forward, the TSE 1st Section promotion was a big driver, with passive investors pushing up the stock. 

We continue to focus on stocks that benefit from innovation and disruption. The global mega trends are here to stay in our view and the underlying drivers of decarbonisation, automation, and artificial intelligence, remain powerful. It remains our conviction that Japan's smaller, more agile, technology-savvy small caps are the best way to play these thematics and provide better long-term returns than old-school Japan.  We update our spreadsheet every Friday after the close so that you can keep a close eye on market moves, growth and valuations.

The main events

Toshiba has been the subject of multiple scandals in recent years. The latest lapse of governance follows an investigative report that Toshiba’s management and METI colluded to apply undue pressure on foreign investors. The whole scandal shines a spotlight on corporate governance reforms in Japan, but with many Japanese shareholders voting out the Chairman of the Board and other directors, the double-lock of the Corporate Governance and Stewardship Codes seems to working. The Asahi editorial was particularly scathing.

“Should the government continue to refuse to explain, believing in obfuscation where national security is concerned and in bullying foreign investors into submission, both overseas and domestic investors will deepen their suspicion about the fairness of Japanese capital markets and corporate management.”

Asahi News

Blue Dot: The Blue Dot Network brings together governments and the private sector to certify infrastructure projects that uphold global principles in a transparent and sustainable way. Japan, the US, and Australia announced the network in what is seen as a rival to China’s Belt and Road Initiative. OECD

Semicon Japan: Japan is trying to lure global chipmakers like TSMC to build advanced chip manufacturing plants in Japan. Japan imports more than 60% of its semiconductor chips from overseas, many of them from Taiwan and China. METI views chips as important as food in light of the potential impact on national security. Nikkei

Green Growth: METI laid out its strategy for achieving Carbon Neutrality by 2050. The plan calls for renewables to account for 50-60% of electricity supply, with the remainder generated by hydrogen (10%) and nuclear/thermal (30-40%). These targets will be further refined later this year into a Strategic Energy Review that will set the direction of renewable investment for the next decade.  MOFA