Certain aspects of Japanese culture underpin the market position of leading products in a variety of industries, writes Tatsuya Suzuki.
Those familiar with Pokémon will surely know the theme song to its popular TV adaptation: ‘Gotta Catch ‘Em All!’ While Ash Ketchum, the series’ protagonist, never managed to catch all the Pokémon, Japanese popular culture more generally has caught the hearts and attention of billions of people across the world.
This notion of soft power is always hard to assess. Investors have recently moved back to Japan because of confidence in corporate governance reforms and in corporate earnings. Yet it is also worth considering the strength many Japanese companies and sectors derive from unique and authentic brands.
Across a number of Japanese industries, some aspects of Japanese culture or branding underpin the market position of leading products, both domestically and internationally. This helps establish a long-term structural advantage for certain Japanese sectors, that is easy to forget when thinking about investment opportunities.
Game on
The gaming industry is a good example. Japan is home to industry behemoths such as Sony, Nintendo and Sega, that have created some of the best-loved gaming franchises in history such as Super Mario Bros, The Legend of Zelda and the Tekken series. The popularity of titles such as these has made Japan a force in the market, with the Japanese gaming industry accounting for 16 per cent of the global market size in 2021.
What makes the country’s gaming studios so successful in the first place is their determination to stay true to Japanese culture, as noted by Hironobu Sakbuchi, creator of the Final Fantasy series who recognises that his “Japanese cultural background is what attracts people towards [his] games in the first place”, as it allows for the creation of unique characters and stories. This translates to strong performance. For example, Koei Tecmo HD's series of tactical action games, Dynasty Warriors, have sold a in excess of 21m copies.
The popularity of this industry has also created numerous spin-off opportunities, that have proved to be very profitable. Of course, there is the aforementioned Pokémon TV series that has been airing for 20-plus years with 25 seasons, and Nintendo also co-produced The Super Mario Bros. Movie, which grossed more than $1.3bn worldwide. Bandai Namco is leveraging its popularity in a different way, namely through the opening of a store in London this August, which will increase revenues through sale of merchandise and expansion of its global presence. The influence of Japanese culture in the gaming industry can be leveraged to generate more investment opportunities.
Cool Japan
The power of Japanese culture is also felt in lifestyle industries, where the phenomenon of ‘Cool Japan’ is being used by Japanese companies to boost their brand popularity. This is especially effective in Asia, where fashion brands including Uniqlo and Japanese disposable hygiene products like Unicharm have proven to be especially popular. A major reason for this popularity is these brands’ unwillingness to follow other trends and focus on what they do best.
For example, Uniqlo’s corporate strategy is based on “totally ignoring fashion”, instead favouring Japanese culture to create a unique reputation of affordable yet high-quality products. The quality of these products does not only refer to the material, but also to Uniqlo’s unique designs, many of which involve the incorporation of traditional Japanese art. The popularity of this approach has led to the brand expanding global sales in south-east Asia, India, Australia, Europe, and the US, with the company already increasing its predicted 2023 revenue by Y30bn ($203m).
But there are still key challenges present for those focused on investing in Japan. Many investors may be pouring into Japan because of improvements in cross-shareholding, external directors and corporate earnings, but Japan still has improvements to make if it wants to catch with the US and Europe.
For example, the percentage of JPX-Nikkei 400 companies with a majority of independent directors (18 per cent) still lags that of the S&P 500 (86 per cent) and FTSE 150 (93 per cent). Furthermore, Japan is struggling to generate sustainable inflation due to historically low wages, and it will take time for the recent raft of wage increases in Japan to achieve this. This could certainly hamper the growth ambitions of many Japanese companies.
Therefore, one should remember that investing is about finding companies that can use structural advantages to generate returns. Clearly, Japanese culture and branding is one of these unique advantages, but not every Japanese company is tapped into this. However, if you pick a company that leverages this effectively then you can expect them to increase their revenues because Japanese culture’s popularity across the globe isn’t going away to anywhere anytime soon.
Tatsuya Suzuki is chief portfolio manager of the SuMi TRUST Japan Quality Growth Strategy
