Japanese business adapts to new consumer behaviour

Market Development: The Tokyo markets declined at the beginning of May, but recovered towards the end of the month, supported by rising expectations that the tightening of the US monetary policy will slow down. The Dollar-Yen rate peaked in early May but then declined over the rest of the month.

KOMMENTAR DES FONDS
17 Jun 2022

Market Development: The Tokyo markets declined at the beginning of May, but recovered towards the end of the month, supported by rising expectations that the tightening of the US monetary policy will slow down. The Dollar-Yen rate peaked in early May but then declined over the rest of the month.

In May, the TOPIX and Nikkei rose 0.8% and 1.6% respectively in Yen terms, whilst the Mothers Index, which represents emerging stocks, declined 3.3% over the same period. Inflation pressures continued and the visibility of domestic corporate earnings remains unclear. The emerging markets deteriorated, whilst large caps remained relatively flat.

The Japanese Government decided to lift border restrictions for foreign, non-business visitors from 10th June. Investors are expecting an increase in tourist consumption in addition to domestic consumption, which has already begun to recover in line with the recently declining number of COVID patients in Japan. Hotels, restaurants and theme parks are expecting a further increase in visitor numbers during the coming summer season.

Market Outlook

The Core-CPI of the Tokyo Metropolitan area rose 1.9% YoY in May, almost the same as the previous month. The stable Core-CPI in the Metropolitan area is due to the Government’s financial support for gasoline suppliers, enabling them to cope with rising WTI prices.

Inflation pressures continue in Japan, and as such we must watch the earnings trends of domestic companies carefully. The domestic consumer trend in April, which is measured by the Cabinet Office’s Economy Watchers DI, shows an improvement since February 2022.

That said, the forecast for the consumer spending DI in April weakened slightly. In this context, we need to analyse how smoothly companies can transfer increased input costs to sale prices. We believe that only companies with loyal customers or those that provide “one and only” products will survive the current difficult market environment.

Furthermore, the situation between Ukraine and Russia continues to be a threat to the global economy. As a result, we believe that we need to keep a cautious stance in relation to the market.

Japanese lifestyle has certainly changed over the last two years. For example, people no longer go to small and crowded spaces, such as Karaoke and Izakaya (a night pub) as often as before the pandemic, to protect themselves from COVID and other contagions. We will continue to carefully watch consumer behaviour going forward, but for now, we will maintain the current portfolio.

Portfolio Development

We have sold and sliced Toyo Tire, IHI, KHI, Topcon, JTower and Seria over the month. We have maintained a relatively high weight in companies that should benefit from inbound demand, such as Kotobuki Spirits, JAL, Oriental Land and GMO Payment Gateways.

Kotobuki Spirits produce and sell confectionery such as cakes, rice crackers and sweet bean jellies. The company offers confectionery products for Japanese and foreign customers at highway junctions, public transport stations and international airport terminals under the brands: Maple Mania; Tokyo Milk Cheese Factory; Francais; LeTAO and GLACIEL.

The company recently raised the prices of their products on the back of increasing raw material costs and pursued higher sales of confections for those willing to pay higher prices for special occasions. People tend to spend more when travelling or celebrating, and as such, the placement of their products in airports and station shops remains an important part of their strategy.

As always, we invite investors, or prospective investors in the Strategic Japan Opportunities Fund to discuss the opportunities with the investment team if they would like to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact Adam or visit the Fund Page >

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 10/06/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.