The Aging of Japan: Glass Half Empty or Half Full?
Virgil Adams Portfolio Manager
Matthews International Capital Management, LLC
It’s easy to look at Japan as a glass perennially “half empty.” The demographic challenges the country faces are frequently cited as impeding any sustainable, long-lasting recovery. Investors, however, are rewarded not for merely “following the crowd” and adhering to the consensus opinion regarding Japan’s challenges, but for identifying the opportunities that lie within. In this context, we believe there are attractive opportunities emerging from the aging of Japan’s population and the ongoing shifts in Japan’s demographic makeup.
Japan’s Growing Elderly Population
Japan’s demographic problems are well known and well documented: by 2050, Japanese over the age of 65 will make up 40% of the country’s population, while the overall population is expected to decline from 128 million in 2005 to only 95 million by 2050. As a result of the aging of Japan, social welfare spending is expected to rise from 18% of the national budget in 1992 to 27% by 2025—putting considerable stress on the nation’s finances.
Meanwhile, sociological changes are having a profound effect on Japan as its population ages. The rise of the nuclear family and the increasing rates of working women have contributed to the demise of the traditional family structure. In this structure,
it was not uncommon to have three generations sharing the same roof, and it was considered natural for families to take care of the elderly.
The “graying of Japan” is nearly always viewed as a crisis for the country, but we see opportunities in the following areas:
Increasing demand—and a change in the demand makeup—for medical equipment, pharmaceuticals and services for the elderly. Specifically, understanding the dynamics of changes in the national health insurance policy and the products and services that would be aided or hurt by these changes, as well as understanding the potential for generic drugs in Japan are two areas in which the private sector could see strong growth prospects.
Views toward medicine are changing. We see a rise in preventative and non-Western medicines that create opportunities for the makers and distributors of these types of remedies.
Changing consumption patterns based on demographic shifts. It will be essential to understand the differences between how young people spend and how older people spend, as well as the impact of tax changes that create incentives for the elderly to consume rather than save. Doing so will create opportunities for retailers and others with products and services that will benefit from these shifts.
“New Industry” or “New Target Market” opportunities. We expect a host of new markets to emerge or expand, including privately run nursing homes, gaming hardware and software focused on the elderly market and companies catering to the pets that many of the elderly own and pamper.
Nursing Homes in Japan—A Growth Market
One area benefiting from the aging of Japan is the private nursing home industry. There are currently 550,000 people in public nursing care facilities, compared to only 115,000 in private
facilities. The quality of care offered at private facilities is generally much better than that at government-run homes—but this comes at a price. Typically, a private facility will charge an up-front fee, along with a monthly assessment that is slightly higher than the average pension a retiree in Japan receives.
The private care market is extremely fragmented, with hundreds of companies each operating only a single facility, and makes it impossible for a tenant to relocate to another part of the country if their family has moved from the area. However, there are three large, public companies that have meaningful exposure to the nursing home industry, and two of those three are companies much better known for their other, more mature (read “slower growing”) business areas. These companies “have scale” in the nursing care industry: they each run many facilities
across the country, and are seeing opportunities to take over the smaller players in the industry that haven’t been able to achieve the benefits of larger scale. They also bring proven business models, good brand recognition and trust, and high levels of standardized service to the facilities they either buy and renovate, or build from scratch.
Changing Spending Patterns of Retirees
As the elderly population expands, we are noticing some interesting
shifts in consumption patterns. It is well known that the Japanese are big savers. After over a decade of “saving as the economy crumbled,” we are seeing more elderly people treat themselves to overseas trips, resort vacations and dining out. We also expect to see an increase in spending by the elderly on their grandchildren—paying for college or exam preparation courses, providing the down payment on a house or apartment, and buying clothes and accessories.
Among retirees living on pensions, the average Japanese will save nearly one-third of their pension income. When Japanese people die, they do so as the wealthiest individuals in the world, with an average of $350,000 in net assets per person. Currently, most of this wealth is then eaten up by the high estate taxes levied by the government.
Broader Demographic Changes
Over the longer term, the aging of Japan’s population does present some formidable challenges. A country in which half of the population is either too old or too young to work cannot remain competitive unless it undertakes some radical changes. However, we have identified the following opportunities among these challenges:
Changes in immigration policy. There are already 2.2 million
foreigners living in Japan (over 55% are from China and Korea), including at least 11,000 engineers and scientists teaching and conducting research at Japanese universities. A more relaxed immigration code should strengthen relations
between Japan and other Asian countries.
Efforts to bring more women into the workplace. These efforts should help offset the decline in the working population, would necessitate the creation of widespread and high-quality daycare facilities, and would change the dynamics of male/female spending patterns.
Extension of the mandatory retirement age. Doing so should keep more people in urban areas and perhaps
result in greater consumption as one’s “nest egg” wouldn’t need to be as large upon retirement.
Efforts to boost the competitiveness of Japanese workers. This could take the form of more spending on IT services, greater factory automation, more efficient supply chains and logistics systems.
As investors in the Japanese market, we evaluate the longer-term structural changes in the country and identify opportunities within periods of disruption. We are finding a host of investment opportunities within the seeming calamity of Japan’s aging population.
The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investments vehicles.
Q&A: Japan’s Aging Population Roundtable
This month Asia Insight focuses on the topic of Japan’s aging population and features a conversation with the members of the Matthews Japan Fund team:
Taizo Ishida, Lead Manager
Virgil Adams, Co-Manager
Kenichi Amaki, Analyst
The information below does not constitute a recommendation to
invest in any sectors mentioned.
Q: Is there something that can offset the decline in Japan’s
labor force?
A: Taizo Ishida
Obviously this is not a very positive story. But I do think people may be overestimating the impact of the decline in Japan’s population. The estimates reported in the lead article tend to be extremely negative, but it is important to remember that forecasting out 20 to 40 years can be extremely challenging. I tend to be slightly more optimistic as I think we will see an increase in the number of births in Japan over the next 20 years. In part because I believe the lack of childcare in Japan will gradually be solved. If this situation does improve we should see more women will be able to join the workforce and having more children.
Q: Can we really expect changes to Japan’s immigration policy?
A: Virgil Adams
Consensus opinions are overwhelmingly negative
about any progressive changes in Japan’s immigration policy. Change in this area has historically moved at a glacial pace. However, if we are able to see even a minor change in immigration policy it could have an amplified effect on the workforce in a positive way.
In addition, there is potential for a significant government shift in the next elections. It is possible that the long-reigning LDP (Liberal Democratic Party) could be unseated by the DPJ (Democratic Party of Japan). The DPJ is advocating significant reform in Japan. This could be a potential catalyst for change in the country.
A: Taizo Ishida Over the last 15 years, I haven’t expected government
action to have an impact on the economy. This time around I have the sense that something has to happen. The big question is whether this change will be positive or negative.
Q: What will it take for Japanese to start spending more?
A: Taizo Ishida Given the Japanese experience with over 15 years of depression, they are still not in the mood to spend, as their wages have not grown for years and they have no confidence in the economy. This mindset has extended to young people in their 20s, who also have no interest in spending. In fact, a recent survey reported that Japan’s pastime is saving and that they are very worried about having enough money when they get old.
A: Virgil Adams Everything comes down to the economy. Unless the economy improves, nothing else will matter. An improved economy will help address all of the challenges outlined in the lead article. Even if Japan is able to make advances related to childcare, health care and pension reform, these improvements won’t unlock savings and have the needed impact on spending without
a much improved economy.
Q: What industries do you think stand to benefit from these shifts?
A: Taizo Ishida I continue to believe that there are companies that stand to benefit from the fact that the Japanese are sitting on so much cash—over $7 trillion. The likely beneficiaries are asset managers
and wealth managers. I think the services they offer will be increasingly in demand.
Q. What are Japanese companies doing?
A: Taizo Ishida Japanese companies are focusing on where the customers
are—outside Japan. As a result, Japanese companies are shifting their focus to Asia. In fact, last year 36% of the total operating profits of Japanese companies came from Asia, excluding Japan. This is what Japanese companies do best—they go where the customers are.
A: Virgil Adams Industries in Japan are very fragmented, like the auto and fiber optics industries. This fragmentation has led to low profit margins. On the positive side, companies operating in these fragmented industries in Japan have to develop competitive business models to be successful. We have seen that companies that can make it in Japan’s fiercely challenging market and economy are prepared to compete and be successful in markets outside Japan.
The Japanese have perfected delivering high quality at a low price. Japanese companies are known for the quality and safety of their products. We are seeing that consumers in Asia are increasingly willing to pay for this Japanese quality.
Q. Where else are you seeing changes?
A: Virgil Adams One of the biggest impediments to wealth transfer between generations in Japan has been the country’s onerous estate taxes. Earlier this year the Japanese government rolled out cuts to estate taxes aimed at helping stimulate the economy and specifically
the real estate/property sector. The tax cuts are limited to gifts intended for the purchase of a home or property. It is too early to tell if this program is having an impact on giving and the economy.
Q. What else does Japan need?
A: Kenichi Amaki Japan needs a complete overhaul of its national pension
system. In fact, 35% of Japanese don’t pay their pension dues because they do not trust the system and that sufficient funds will be available for them when they retire. As a result, there is a complete shortage of funds in the national pension system. Japanese continue to save at such high rates because they have a complete lack of confidence
in the system and are afraid of outliving what they have.
A: Taizo Ishida Japan needs to regain its confidence internally and externally. No one believes in Japan right now. But, if you look at the country on a company by company basis, Japan is very competitive globally.
