Is Japan springing into bloom?

A reboot of Japan’s semiconductor industry

Japan is set to join other countries in a buildout of leading-edge semiconductor capabilities, which is being prioritized following the pandemic’s halt to global commerce and rising trade conflicts. Japan’s Rapidus—a newly formed foundry for advanced chip manufacturing, a quasi-public venture with IBM Research—is set to receive more government funding for microchip fabrication plants (fabs) in Hokkaido. Japan plans to differentiate its business from other foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, and Intel with an impressive consortium of its own that has corralled major firms such as NTT, SoftBank, Sony, and Toyota. The country’s strong manufacturing ecosystem of materials, equipment, and engineering talent will help Japan-based fabs.

New Policies to tackle aging demographics

The issue of graying societies is not exclusive to Japan. Amid China’s declining birth rate, the country’s colleges extended spring break this year to give students more time to “learn to enjoy nature…and enjoy love.” For Japan, there is also some optimism in a host of new measures aimed at incentivizing people to have children. These plans include:

• • Broadening free school meal programs
  • Student loan repayment support for expecting families
  • An expansion of scholarships and child support payments, which were previously subject to income caps, to all families
  • Additional income for fathers who take paternity leave, matching their post-tax salary

Wages and pay equity

The Bank of Japan’s dovish stance, announced on April 28, to support wage growth through continued monetary easing sent the yen lower while lifting stocks. This may help Japanese manufacturers as a weak yen should boost the value of their repatriated profits and make their exports cheaper.

On the flip side, consumers in Japan may face more struggles with the cost of living. This is one reason that Japanese Prime Minister Fumio Kishida has emphasized the need for wage growth and policies to address pay inequality.

He opened his speech at the New York Stock Exchange last year in a similar fashion to one delivered five years earlier by his late predecessor, Prime Minister Shinzo Abe, with humor and baseball metaphors. He then called for salary increases to beat inflation. In March, there was progress on this front when the country’s main labor unions won a preliminary agreement for wage hikes of 3.8%—the largest raise since 1993.⁴

To address an area in which the “Abenomics” policy arguably failed, Kishida called for an “essential” new system to draw more individual assets into markets, referring to a “new form of capitalism” for wealth redistribution. To this end, he proposed making the country’s tax-exemption system a permanent program, saying that such incentives are needed because Japanese households have about US$14 billion in personal financial assets but “only around 10%” invested in stocks.⁵Turning the dial on that–even a little–could make a big difference for Japanese equities. We believe investors looking for exposure may find Japan-focused passive exchange-traded vehicles as a compelling means to gain a low-cost diversification to Japanese stocks.

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