Small cap tech firms in Japan offer growing investment opportunities

Japanese Prime Minister Shinzō Abe is currently pouring his efforts into “work style reforms.” The Japanese are well known for their excessively long working hours. If you are at Tokyo Station at midnight, you can see a lot of people taking the last train home, having just finished their work for the day.

In addition to a lack of staff due to suppressed recruiting activities during the so-called “lost decades” or “lost two decades”, there are structural factors that make work inefficient in Japan. This includes too much time spent sharing information in meetings, inefficient paper-based workflow and a lack of development to create a remote access working environment.

Prime Minister Abe is trying to reform this “work style”, which was a serious issue in the country even before recent public debate following high-profile suicide cases of employees of major companies. Problems related to labour shortages have occurred in the past – mainly as a result of the declining birthrate and the baby boomer generation now retiring – but they came into focus when reconstruction efforts were delayed due to a lack of labour force following the Great East Japan Earthquake of 2011.

The Japanese labour market is tightening, with an unemployment rate of 3% as of September 2016 – an unusually low level from a global perspective, though it is likely to be due to being close to the structural unemployment rate. Following increased economic activity after the introduction of Abenomics, many Japanese companies have responded to their business expansion by increasing employee overtime rather than expanding the number of staff.

Increasing productivity and reducing the required labour force are two essential strategies required to deal with the labour shortage. Prime Minister Abe’s work style reform agenda starts simply with its first intention to improve the effectiveness of working in Japan, but also includes specific targets such as overcoming problems through the use of IT.

Recent developments in technology such as Artificial Intelligence (AI), virtual reality, and communications technology have been able to remove the time, space and physical restraints on businesses, helping Japanese companies to start changing their work style. This is bringing new business and investment opportunities.

For example, Vcube, a provider of visual communication solutions, was listed on the Tokyo Stock Exchange in December 2013 and has a current market cap of USD 150 million. It offers businesses the tools to hold video conferences and online seminars, as well as remote access systems removing the need for working environments to be constrained by place or time, and supporting effective work operations.

Another example is translation company Rosetta. This emerging firm provides a tool for automated translation with twice the accuracy of Google Translate for the Japanese and it was listed on the Tokyo stock exchange in November 2015. Rosetta’s AI utilises deep learning, and the company intends to achieve 95% accuracy in in the next ten years. Japanese people can have a linguistic disadvantage in business and are paying an enormous cost as a result. We expect to see more companies like Rosetta attempt to overcome this through the strength of information technology. Thus, this is an area that investors should be keeping a close eye on.

Reform of the nation’s working style is not always desirable for large companies, as it may be arduous for them to reform current employment conditions due to the difficulty of reconciliation amongst stakeholders and the provision of flexible working. Over time it is likely that talented employees will move to companies which offer a more flexible working environment. However, there is a tendency for large companies with high fixed costs from employment to focus on sales, being resistant to offering flexible conditions. Thus, in times of change when employment improvements are required at speed, small to medium sized companies will have an advantage. The small cap space is exactly where new opportunities increasingly lie for investors.

The challenges of an aging population are a common theme across developed nations, not just in Japan. In the US and Europe, they have actively tried to solve this problem by increasing immigration but this has contributed to social conflicts emerging overtime. In China, which has the world’s largest population, the one child policy has led to a rapidly aging population which will lead to labour shortages in the future. As a country that suffers from an aging population, Japan has created services to address this issue and these are likely to be exported and made marketable across the world.

Technology improvements which can help solve these problems, such as AI, are progressing rapidly. Companies which utilise technology to offer solutions to these issues are often small to medium sized companies and key investment opportunities exist in these areas. As these issues will be challenges that their own countries face going forward, European investors may find it interesting to keep a close eye on developments made by Japanese companies as these could provide opportunities for value and growth.

Katsunori Kitakura, lead strategist at SuMi TRUST

 

ABOUT THE AUTHOR
Mona Dohle
Mona Dohle speaks German and Dutch and is DACH & Benelux Correspondent for InvestmentEurope.

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