Japan 2026 – What’s New?

I’ve just spent three weeks in Japan.  It was principally for personal reasons, but Japan is changing rapidly right now and I find it useful professionally to take the temperature regularly.  As last year, I share my thoughts in case readers do too.

For investors it is perhaps even more important now.  The chance of an abrupt change in political direction under Sanae Takaichi if she wins the general election on February 8^th  is high.  And the need to diversify away from U.S. equities – and for the same reasons global equity indices – is imperative.  See my recent article It’s Different This Time – Or Is It? to read why so.

Japanese assets and services are very cheap

I will start with what broadly accorded with my expectations and didn’t surprise me.  On any purchasing power parity basis, Japan is absurdly cheap.  Almost everything converted back to sterling was a steal.  Tokyo metro and bus tickets were under £1 for journeys up to about 20 minutes.  The most we paid for a high-class hotel room including a good breakfast for two – in Fukuoka (Kyushu) on the middle night of a long weekend - was about £160.  Petrol in the countryside was almost exactly half the price it is in Britain.  We paid £100 per head for a good meal with sake and beer in an expensive Tokyo hotel, but elsewhere didn’t pay much more than £35 or £40 per head.

There were a few exceptions:  shinkansen tickets - admittedly ‘green class’ on the fastest Nozomi trains – cost about £75 an hour per head; we managed to pay £7 for a coffee in the same hotel, compared to the usual £2 to £3.  In contrast, in Naoetsu, the post-industrial town my wife comes from, four of us had a decent Italian lunch at a chain restaurant for a total of about £13.

There are lots of tourists

No surprise therefore that there were plenty of overseas tourists.  We were there in low season, confirmed by a long conversation we had with a café owner on the tourist island of Miyajima, near Hiroshima.  They were mainly Korean, especially in Kyushu, with a good smattering of Chinese.  It is possible that Xi’s warning that Japan is a ‘dangerous’ country to visit has put off mainland Chinese and they were Taiwanese/Hong Kong/Singaporeans.   

However, most tourists we saw were domestic.  At Miyajima our café was empty, but the shopping street near the ferry was so busy we had to queue to eat - even in low season.  We spent a day at Dazaifu, a big temple near Fukuoka on a Sunday where I last went 42 years ago.  The trains were packed, the approach street was full, there were queues simply to be photographed next to an iconic statue of a dog, or (as we did) to worship at a fox temple to one’s ancestors.  My mother’s family name is Fox, so I had to go.  But they were all Japanese.

As last year, there is resentment at the weakness of the yen.  Most Japanese remain scrupulously polite and welcoming, but in conversation, there is no doubt that they would like their own country back and would like to be able to afford to go abroad.

Demographics

Tourism brings me on to immigration and demographics.  The number of the working population has actually increased in Japan, despite the decline in the 18-65 ‘working age’ numbers.  That is because it is now normal to work to 70 years old or more, and because there is significant immigration.  Taxi-drivers are almost all over 70; restaurants chefs are often 60+; Haneda airport hotel cleaners and restaurant staff are largely from South and SE Asia.  One of the outcomes is lots of Indian, Nepali, and Vietnamese restaurants.  But they have learnt to assimilate well.

What surprised me?

So far, so not completely unexpected.  What surprised me?  The clientele of most (non-tourist) restaurants was young.  Together with the age of the chefs, it was almost the reverse of what I see in the U.K.  Some 20- and 30-year-olds in Japan clearly have money to spend.  Given the demographically driven shortage of labour, that shouldn’t be a surprise.  But Japanese companies have at least publicly been slow to increase wages.

Japan Inc. didn’t work as smoothly as it has in the past.  We may just have been unlucky, but we were hit by two major ‘outages’.  One was caused by an accident in heavy snow on the Kan Etsu freeway.  It is the only major road route to Niigata-ken, and as a result all deliveries, including our suitcases, were delayed by 24 hours.  It was a first world problem, but it was unusual for Japan.

The second felt much more like Britain on a bad day.  A power outage meant that no trains ran on the crucial section of Tokyo railway between Shinagawa and Ueno, and in particular, the iconic Yamanote line.  The newspaper reports said that nearly 700,000 people were affected.  The problem was apparently caused by a fire on a construction site, but it took nearly 12 hours to resolve, and in the meantime, there was chaos as travellers struggled to find other routes.  My wife took two hours to make a 30-minute journey.  I used google maps and took to the Tokyo buses with more success.

I visited two Peace Parks on my visit.  One was the famous one in Hiroshima: it is one of those places everyone should visit, however sobering it may be.  The second was a small park set up in Naoetsu to commemorate the prisoner of war camp there.  It is surprising for two reasons.  It was set up 40 years ago by the local community, at a time when Japan simply wanted to forget.  As well as the mainly Australian prisoners who died there, it also commemorates the prison guards later executed by the Allies.  I first went to Naoetsu nearly 40 years ago, and I am ashamed I haven’t visited before.

The future of Japan

I picked up other soft indications that, for better or for worse, Japan is becoming more like other developed western countries.  Major cities outside Tokyo are more similar than they used to be, with the same chain shops; standards of cleanliness are still high, but you can find unswept subway steps; the staff on the shinkansen no longer all bow every time they enter or leave a carriage; at most restaurants from Tokyo to the remotest of towns, all customers are welcomed, whether mother and toddler groups or foreigners; tattooed individuals are permitted in onsen, something which was completely unacceptable a few years ago.

The General Election

Which brings me on to the future and Sanae Takaichi.  Unless there is a significant change in political direction, she has overwhelming support among the public and will win the February 8th election.  Her agenda will be about investment and immigration – not unlike Trump or Farage.  It will be equity friendly, although that is not of itself a reason for buying Japanese equities.   

There were big billboards at Shinagawa Station for the new linear ‘mag lev’ train.  Apparently there has been resistance from one particular prefecture which is being left out, but it is going ahead – and at a price per kilometre substantially lower than HS2.  When open, the trip from Shinagawa to Osaka will be 67 minutes compared to the 139 minutes it took us on a Nozomi train – i.e., less than half the time.  It will take less time to get to Osaka than to some outlying commuter hubs of Tokyo.  Those I spoke to thought that would make a big difference.

What will Takaichi do about currency?

The big question for Takaichi will be the currency.  Like Trump, she would like lower interest rates, but that might result in an even weaker yen, which would not go down well with her supporters.  With a new mandate, she will be in a stronger position to face down the establishment, in the form of the BoJ and behind them the Ministry of Finance.  Which she channel her inner Margaret Thatcher?  How will the bureaucrats respond?

My observation is that at some time the yen will turn, though I cannot predict the timing, and it may go weaker first.  Purchasing power parity will eventually force it.  The Bank of Japan has said it will raise rates further this year, and that may be a catalyst.  On the other hand Takaichi’s proposal to suspend consumption tax on food is giving the bond markets the heeby-jeebies.  

What about investors?

For investors, there is lots to like about Japan equities.  The entry price is incredibly cheap because of the weakness of the yen; although economic growth is still low, earnings growth will come from better corporate governance, and possibly rising leverage; valuations are being pushed up by pressure from the Tokyo Stock Exchange on the lowest valued companies to do something, and also by merger and acquisition activity, especially by overseas private equity houses.

But that all said, the decisive reason for investing in Japan is the danger of not being diversified away from the United States.  As I pointed out in my last blog, the expected real ten-year return in the U.S. from equities at current valuations is close to zero.  Japan is cheap relative to its history on a similar basis and trades at about half the price of the U.S.  It’s not as cheap as China or the U.K., but the fundamental story is much stronger than the U.K. and governance is better than China.