12:47 PM PT
Olympia, WA
I just returned from a one-week trip to Japan. Recently, Japan has been a key driver in market movements. The Japanese Yen carry trade is one of the largest trades that is being done by institutional investors right now, and that trade unwinding is one of the key factors that is attributed to the recent correction. So, in addition to the trip being an enjoyable vacation, it also served as 現地現物 (Genchi Genbutsu), which means “go and see,” or get out there and go see what’s actually going on, which is an important thing that I believe investors must do. Too many investors make decisions from the ivory tower. You can do a significant amount of research on something, but often times you will not fully understand until you see or do it for yourself.
One thing that made Japan an opportune place to visit was the strength of the US Dollar vs the Japanese Yen. Due to the Yen carry trade unwinding over the last two weeks, the Yen has strengthened some, but over the last 5 years, the USD has strengthened close to 50% vs the Yen, so you can still get a lot of bang for your buck as an American.
It turns out I was not the only person to notice this and make a trip out of Japan. The number of tourists visiting Japan has just recently surpassed the pre-Covid 2019 high.
Japan Tourist Arrivals
Japan is an advanced economy, with the 3rd highest GDP in the world, on par with and even surpassing the US in some regards. Given their economic development, it was interesting to see how everything was quite a bit cheaper there. For example, the first stop in the trip was in the Kyoto region. In Nara in that region, we hung out with some friendly deer, and also we stopped by this cool restaurant that served mazesoba.
It was an amazing, delicious meal, and the shocker was that it only cost 1,000 Yen all-in (tax, tip, everything), which comes out to about $7 in USD. Compared to the US, that’s a meal that would be more like $20+ nowadays.
However, the surprising thing was that when talking with local Japanese, one of them was complaining about how ramen had gotten so expensive at 1,000+ Yen. When I look at the statistics for real Japanese wage growth over the last 20 years, it has gone nowhere, so it makes sense that the Japanese are not happy with this bout of inflation, even if it is a much lower cost than it is for us Americans.
Average Annual Real Wages In Japan
Another observation I made was that Japan is essentially a saturated market. With growth being the name of the game for US corporates, many companies are seeking out new consumers in any place they can get them. From what I could tell, they were not lacking in anything in Japan. All the big US clothing brands were there, even the newer trendier ones. Among shoes, for example, you could see tons of Nikes and Adidas, but also the newer trendy On Cloud sneakers and Hokas. Everyone I saw was also using a newer smartphone. I saw a lot of new iPhones. I had seen the sales numbers, but I hadn’t mentally registered that Apple was so popular outside the US. The only thing I noticed that was absent was electric vehicles. I didn’t see any Teslas or really any EVs to speak of. This makes sense as the Toyota CEO has talked in the past about how he believes that EVs are not going to be the future of automobiles. Aside from EVs, from what I could tell, Japan does not appear to be a market where foreign companies would be able to acquire too many new customers.
Getting back and looking at some of the data points, and after listening to a presentation by Richard Koo, the top economist in Japan, I think some of the trends we have seen over the last several decades are set to change. If we look at property prices in Japan, we saw them peak in 1990 at the height of the Japan bubble, which then led to a 20-year decline in prices, but more recently, the last decade has seen those prices bottom and then rise. In the last few years, the pace of that price rise has increased.
In Richard Koo’s presentation, he showed how Japan’s population peaked in 2009, which would make you think that wages would have increased as there would be more labor scarcity, but, per the real wage chart above, you can see that has not been the case.
He showed that despite the working age population peaking, a larger share of that population has had to enter the workforce, with more women working and later retirements. This has kept wages from increasing due to labor scarcity. However, from here you can see that the gap between the working age population and the number of people working has narrowed to a point where I think we will start to see real wage increases in Japan.
Compared to the region, Japan’s wages have been high, but now they are much more competitive.
Connecting this all together, I think what we will see is more capital investment in Japan by Japanese companies that will increase overall production and increase productivity in the Japanese economy. Most investment by Japanese companies in the past few decades has been outside of Japan, but it looks like this is setup to reverse. It looks like inflation will be structurally higher in Japan, which means that the Yen will continue to strengthen from here and that their monetary policy will start to look more normal. This all looks like a setup for many Japanese companies performing well going forward, so I will be digging into investment opportunities that may exist in Japan. Overall, it was a good vacation! Fun with a side of Genchi Genbutsu (現地現物).
