Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview “Made in Japan”!
“Made in Japan” is a professional private investor who shares ideas with 5,000+ followers under the pseudonym @InvestInJapan on Twitter. The mission of Made in Japan is to “become your field guide to the Japanese Markets” and make the Japanese markets more accessible for international investors. He likes to cover what is often less discussed in Japan: undervalued growth businesses.
Made in Japan, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your investment process?
Thanks for having me on! As a long time follower, I couldn’t have imagined ending up here when I started my Substack a couple of months ago!
So a little about me: I’m Japanese but due to family matters I moved around quite a bit. As a result, I’m bilingual and bi-cultural being exposed to the Western form of thinking along with my Japanese way of thinking. I guess I’m what’s called a third culture kid nowadays having grown up in multiple cities covering several continents.
As a child I’d give my pocket money to my dad who’d invest in different assets like stocks and currencies for me – it was fun to watch that slowly grow. But as you know, you learn the pain of losing. These were my first lessons in investing.
It was really in college though when I started reading about value investing and decided I wanted to be an investor. Most of it was self-taught and I remember wondering why none of the actual finance classes taught the things I wanted to learn. One place I found solace was joining an investment club, where some extremely intelligent people taught me a lot about investing but also just how to think independently. It’s funny because the investment club was tiny, there was also an ‘investment banking society’ with hundreds of people but we were 10 people or something. One of the things I remember learning was to find an ‘edge’ for yourself, and it became clear to me that investing in Japan would be mine.
My career started in the buy-side covering Japanese companies of all sizes. It was helpful that the people around me had international coverage, so it also gave me a perspective on how they think about Japan but also gave me a good insight into great companies around the world. Over time I’d also look at companies globally. I like quality businesses that have plenty of room to grow within Japan that can sustain their return on invested capital. What I also look for is some kind of inflection – whether margin expansion, growth acceleration, or the like in a 12-24 month time frame.
These days I’m investing focused on Japan and working on my Aubstack where I share insights on interesting companies and people from Japan. Whenever I have bandwidth, I also do some research consulting for foreign investors who want to understand the Japanese market or company better. It’s awesome to be able to lend a hand to others who are interested in Japan in this way. For me, this also gives me a fresh perspective.
Why did you decide to start your Made in Japan Substack? Why is now a good time to invest in Japan?
Over the years I’ve been fortunate enough to meet people from the international investment community and the local Japanese investor community. I started asking international investors if they invest in Japan at all and they’d usually say the same thing: Japan is a fascinating market, but demographic issues and language barriers make it difficult. I found it funny because they’d turn around and invest in other countries with similar characteristics! It’s been like that forever. One nuance that took me a while to understand was that many foreign investors were unsure about the cultural barriers. Many sell-side analysts are born and raised in Japan and they don’t really know what happens abroad. So they couldn’t quite elaborate and we needed a ‘cultural translator’. This became my aha! I’ve always felt there’s been an unmet demand for research on Japan so after a while I decided to just do it myself. To test that out I first made an account on X called Made In Japan. The actual handle is @InvestInJapan which is also very telling that this handle was even available! I started sharing my insights and to my surprise, it gained some interest. I felt that there was a reasonable amount of traction so I decided to provide a more detailed analysis by starting my Substack a couple of months ago.
For me, Japan is an interesting opportunity set because there’s a strong case to be made for several inflection points that are not all related. A few that come to mind:
Governance improvements: Japan always had a lot of companies with loads of cash on the balance sheet making them look ‘cheap’. The issue has always been that this cash was never for the shareholders so the market discounted this appropriately. In the last 1.5 years, however, the Tokyo Stock Exchange has cracked down on companies with weak governance/capital allocation policies and low valuation. They name and shame the companies that don’t try to improve their corporate value and are implementing a host of other measures to incentivize responsible capital allocation. I think this sends a signal to the global investor community that Japan is trying to become less of a value trap.
Interest rates/Inflation: Post 2008 Financial Crisis, Japan’s interest rates have been close to zero for over a decade. This is in a country that has been deflationary for so long and we’ve been gradually moving away from that. Inflation seems to be returning and interest rates are ‘normalizing.’ This could be the moment to wake up the animal spirits of Japan again, to take on more risk and for businesses to command pricing power.
If inflation sustains itself at some level, it will no longer make rational sense for businesses and individuals to hold on to cash like they did in a deflationary economy where that was rewarded as their purchasing power increased. Now the opposite will happen which means they are incentivized to put the cash to work. This won’t just be businesses investing but also for individuals too. The government just made it way more attractive to do that through its new NISA scheme.
NISA: Japan has set up its new tax-free investment scheme for households called the Nippon Individual Savings Account (NISA). The first iteration was garbage but this one is promising. It was set up by the government to incentivize households to allocate their excess cash savings into the stock market. Household savings allocated to equities has been notoriously small, less than 20% or so. By providing more liquidity in the markets it could help the financial markets function better and make it also easier for institutions to participate in areas which were previously too illiquid.
Consolidation: I think we’re entering a phase of consolidation amongst Japanese SMEs which has been the backbone of Japanese society. We have an issue where many aging owners are not able to find successors for their businesses. There’s been a stigma around M&A in the past but this is starting to melt away and becoming a viable option. We’re also starting to see more young talent flowing into the M&A space. Moreover, with low interest rates, we’re seeing increased interest from foreign PE firms as well – which all tells me that we’re at an interesting juncture for industry consolidation.
Digitalization: One thing that you’re starting to see after Covid is the need for a more digital Japan has come to the forefront. We’ve been embarrassingly late to digital/software adoption but this was the turning point where we realized it was necessary.
The government set up a Digital Agency to help adoption and provide various subsidy schemes to encourage the use of more software. We even have the term ‘DX’ short for Digital Transformation now added to the lexicon. There’s also the ‘digital cliff’ as it is called here. A lot of IT systems being used by corporate Japan today are super old something like more than 60% will be 20 years or older by 2025. So a lot of IT spending currently is going to maintaining these systems rather than building out new ones. Many people imagine Japan as this futuristic place, but you’ll be amazed how much paper we still use!
Tourism: Japan has been a popular tourism destination, but the weak yen has put this into over-drive. The obvious answer is that tourism-related businesses will benefit but for me the second-order effect is more interesting. With more and more people visiting Japan, I think that cultural exports will accelerate. So-called ‘soft power.’ I expect anything ‘Made in Japan’ to garner more interest, providing tailwinds for various verticals.
I do want to mention that these topics are way more complex and there are equally risks and problems that come as a consequence. Generally, inflation is not seen as a good thing by consumers, and their wage increases need to keep up for this to work or otherwise, it’s quite burdensome.
Having worked both at Japanese firms and international firms, could you tell us a little bit about the difference between the two cultures? What do most foreigners not understand about Japanese business culture?
I’ll put a disclaimer that this clearly has a bias as it is based on my own experience but some of you may resonate if you’ve worked in a traditional Japanese firm.
Whilst many know this already, I think seniority and hierarchy play a big part in Japanese life and organizations. You’re already taught this at a young age in school. You have the Senpai 先輩 who are the seniors in the grades above you and relative to that you are the Kōhai 後輩. You’re expected to respect your senpai and there are obligations to fulfill, including doing grunt work for them. Now depends on where you are but as a Senpai there are some responsibilities too, they’ll take care of you. Sometimes they’ll take out the juniors to dinner and pay for it and things like that.
This bleeds into adult life where the Senpai i.e. your manager or your boss is still respected and almost feared. What this means though is that at times, you find people floating up to the top not based on their merits but simply due to their age. This happens easily because it is very difficult to fire people in Japan. You can imagine how difficult it is for a younger employee to voice their ideas or even just disagree with the more senior people. To this day I still wonder how many great ideas from juniors get killed just because they’re too afraid to mention them. You’re not incentivized to take risks as it is not a meritocracy.
I remember as a junior I’d have to be first in the office to literally water the plants and for lunch, I’d have to go pick up lunch for others at their preferred places. I want to point out that these people were nice people and there was no malice at all. Just that this was what the ‘norm’ was for a junior to do and no one questioned it.
As you might know, our culture is allergic to failure and errors which has been a double-edged sword for us. On one hand, the term ‘Made in Japan’ is synonymous with high quality precisely because of this meticulous process to make things with a mindset to improve and perfect. On the other hand, in an office setting it becomes a huge pain in the a**. When it’s time to make a decision, everyone’s trying to dodge responsibility so they go up to their bosses to ask what the right thing to do is. Their boss will ask their boss and we end up with a needless cycle of ‘let me ask upstairs,’ causing a lot of unnecessary friction.
I quickly realized that working for a Japanese firm wasn’t for me. The 6 am commute in an overloaded train for 45 minutes wasn’t great either!
A friend of mine who is an international recruiter will half-jokingly tell me that a 5-year analyst from Japan is not the same as a 5-year analyst who has worked at an international firm. I found that to be broadly true – in the first couple years because of tradition and culture, you might not end up learning as much.
I don’t want to be very negative on this though, I think this is slowly starting to change as competition for talent is intensifying and employers need to be more attractive to future employees. If you look up the ‘great places to work’ ranking for Japan today, among the top there is still a large portion of it dominated by international firms and I don’t think they’d be happy with that for much longer. I also noticed that the companies I find fascinating in Japan are usually ones that have broken this status quo and have dynamics that are more open to new ideas and innovation.
Also, not that international firms don’t have hierarchies and their own issues with it too, but on average it rewards you more based on merit over age. The structure is also such that you can still challenge colleagues and superiors more easily which I think is important for innovation and progress. In the investment business this is glaringly obvious, imagine being in a Japanese firm and some bright junior analyst disagrees with the portfolio manager but is too scared to voice his concerns because he’s your Senpai.
Your Substack seems to focus on the smaller companies in Japan. Why is that?
I’m pretty open to profiling companies of all sizes as long as they’re interesting. But I’ve got a bias towards the smaller companies, especially those that can grow.
One of the contradictions I’ve felt about Japan is that large-cap growth in Japan gets priced at ridiculously high multiples. It’s not uncommon to see these things trade at 40 times P/E or higher. This is presumably because the cost of capital in Japan is low and in a deflationary economy where the population is declining, growth is rare. However, when you look at these small companies in great competitive positions that are growing double digits with lots of room to grow, you can find them trading for single-digit earnings multiples! The delta is so big that I call this the ‘chasm’. If you look at some of the large-cap growth companies, these also traded at very low multiples early on but as they continued to grow earnings per share at some point brokers start to cover it, institutions start to pile in and the stock re-rates quite significantly and that contradiction gets resolved. Some of these large caps are expensive and can de-rate as interest rates rise, but the gap is large enough that I still think it’s more likely that these small companies will re-rate than the large caps de-rating down to where these small caps are valued.
There are some good reasons for this gap, the first is that Japanese stocks are ridiculously underfollowed. I think it was something like close to 50% of the 4000 listed companies aren’t covered by any broker. Compare this to the Russel 2000 where most companies have some kind of coverage on the stock. Coverage is ultimately a function of investor demand, so if there’s no demand no broker will cover it making it illiquid. This leads to the second reason which is that as a result, the small companies are owned by passive funds and Japanese retail investors. But here's the problem: most of the Japanese populace lost interest in allocating to stocks decades ago and with it, our ‘financial literacy’ of understanding equity capital markets has dwindled. Those same people are setting the prices of some of these assets today.
I think today, it feels like investors are even less interested as both institutions and retail are now more focused on the improving governance play here. These are the aforementioned companies that are cash-rich and with potential to pay these out to shareholders through buybacks and dividends thanks to the TSE crackdown on governance and making it fertile for activists to engage with companies on capital allocation. Now, I think that this is happening directionally and I’m optimistic that this will improve. I also look at ideas here. But overall, I prefer companies that can re-invest that capital and grow at decent rates and these seem to be left by the wayside.
I’ve spoken to other Japanese investors whom I admire with a growth bias, these are private persons that have phenomenal track records. They are all saying the same thing which is that it’s not been a great market for growth companies these last couple of years. I find this encouraging and that this is the better opportunity set to go after right now. There are institutional mandates that I follow with a growth bias also buying ‘value’ names because of client pressure and again, you realize there are perverse incentives all pushing these funds towards the same opportunities.
You’ve written a lot about Japanese investor Tatsuro Kiyohara, can you please tell us about his investing style and why you admire him?
I initially decided to write about him since there are so few notable hedge fund managers from Japan who have achieved the success he did. You’d think we’d have more since we’re still a country with 120 million people! He retired recently and came out with a memoir that my audience wanted to read but was unfortunately only available in Japanese. He’s got an unbelievable story and offers some interesting nuances about the Japanese stock market so I decided to make a summary and go a little further by adding my own research to it. The book itself is incredible because it’s a very raw account of his wins and losses. It’s also fascinating that he’s crossed paths with many of the world’s greats throughout his life like George Soros, Julian Robertson, and Ed Thorpe.
He's truly a Japanese Investor that deserves to be in the hall of fame no doubt, having compounded capital at 20% a year for 25 years investing in Japanese equities. Mind you, Japan was basically flat much of that time!
His investment style was small-cap biased on the long side and large-cap biased on the short side. For his longs, he seemed to like deep-value businesses that were cash-rich. His playbook was simply finding those businesses that were priced for no growth and buying them if he believed it was going to grow.
He was a rulebreaker in a country and was not afraid to be bold. On his longs and eventually, on his shorts, he preferred concentration. One of his first long ideas for the fund was Nitori (Ticker: 9843) which is a huge company today but was tiny back then – and he put 25% of his NAV in this one stock! Even as his fund grew larger, he was not afraid to buy illiquid stocks, even at times the entire float. He’d frequently show up on regulatory filings owning 30% of a business. In terms of industry, he’s seen quite a bit of success in Real Estate, REITs and Industrials. Post-COVID, I understood more than half of his fund was in Japanese megabanks.
What I liked about him was even though he was a value investor at heart, he’d really think for himself even if that meant going against conventional wisdom at times. When he’d buy up the entire floats of companies, he’d thought of it as a point of differentiation against other funds as it was impossible for them to replicate. He’d also buy a stock before his research was complete and ask more questions later with the premise being that if it’s really that cheap getting in early is more important than finishing the work, because the opportunity cost would be large if the stock runs. On the flipside, if it’s that cheap, you probably won’t lose much if you’re wrong anyway. He’s also stopped building complicated financial models as he realized that had nothing to do with making money. Which again, would shock most people.
He’d shun ESG and especially the ‘E’ going back to first principles which is “why do you think us portfolio managers are smart enough to decide what’s good for the environment?” I thought this part was pretty funny.
In the end, I think your true character shows in the hardest of times and it was no different for him. During Lehman his fund was down 72% from its peak and he was moments away from going bust. In that very moment though he felt it was necessary for him to do anything he could to improve the odds of the fund surviving so long as he had clients whom he felt responsible for. So he decided to inject his entire net worth into the fund to do that. In that situation, I don’t think most of us could’ve done that and I felt that to be truly admirable. As a result, he’s compounded his money significantly but also had the journey of a lifetime with clients whom he can call true long-term partners.
For me, he was a story worth sharing because I think he belongs among some of the best in the world given his track record. This is really what Made In Japan is about for me, sharing ideas, businesses, and people that may be well recognized in Japan but not nearly enough to the outside world. I hope to be profiling more interesting investors from Japan in the future!
Were there any particular insights on the Japanese market worth sharing from this book?
Two things that didn’t even occur to me but I thought was insightful:
When you look at cash-rich industrial companies (that a lot of people think is cheap), figure out how old their production facilities are. Nowadays these businesses are old and there’s a risk that this cash won’t go to shareholders but to a massive CapEx program to update their facilities. The cash may prove illusory.
Get a good understanding of how old the owner/founder is. If he/she is old there is a risk that this would lead to a huge selling pressure on the stock. This is because inheritance tax can be up to 55% in Japan which is the highest in the world. In this event, the beneficiary might have to sell a significant portion of the owner’s shares to pay that off. If the stock is expensive then this would likely be done in the open market. If it is cheap this could actually be an opportunity, where the company may decide the buy back the shares directly.
What do you think are the main differences between Japanese and foreign investors?
Generally speaking, I think the investment horizon is shorter for Japanese investors. Not that foreign investors don’t do this too but local investors are much more fixated on the next quarter. They have more of a trader mentality. You can even see this on FinTwit. For those that are unaware there is a huge Japanese FinTwit community and you see quite a few of them posting their daily returns!
Another point without sounding disrespectful was that because the public was so uninterested in the stock market, there is some room for improvement in ‘financial literacy’. For example, no one talks about EV/EBIT or EV/EBITDA multiples in Japan, and only P/E Ratio. The issue with this though is that many talk about the P/E and how it’s expensive without making some fair adjustments. Things like if the P/E is 25 times but actually half of that ‘P’ is cash the underlying business looks a lot cheaper. Also, J-GAAP requires you to amortize goodwill so the EPS may look lower versus actual cashflows. I have seldom seen many Japanese investors discuss ROIC. Only now I’m slowly starting to see more Japanese companies mention the term ROIC.
However, I don’t think you should dismiss them just because of that. I was initially ignorant too but what I found Japanese investors to be good at as a result of their shorter horizon is that the successful ones are extremely good at figuring out liquidity dynamics in a stock. Things like, where will there be forced sellers? Who would be the likely incremental buyers? Etc. Whilst the long-term-oriented foreign fundamental investors are confused by some of this volatility, the good locals know why. I also found that the top investors in Japan are very good at identifying catalysts for a stock and almost pinpointing the timing of it and positioning themselves accordingly.
What practical tips do you have for a U.S. investor looking to invest in Japan? Do you have a favorite broker? Are there any tax, liquidity, order execution, or other issues investors should consider?
This is going to sound pretty basic and simple but I’ve been asked about Japan by a few well-known investors. What I always tell them is to go visit Japan first and see it for yourself.
What I mean is that it’s almost impossible to conceive what life and business is like sitting in the US (the bright side is you have a work excuse to visit Japan!). I often hear the comment: “Why can’t this Japanese company be more like [enter US company].” We are humans that are subject to availability bias so I think it’s important to overcome that. There are so many quirks in life and business culture here that the easiest way to override it is to experience it firsthand. I try to convey these differences whenever I can to my readers.
I think it’s just that important to just go and meet a few companies both good and bad to really form a baseline of what really stands out. It’s easier to do this online nowadays as corporate Japan has embraced online meetings. It was harder pre-covid. Moreover, with more companies doing buybacks and dividends it’s even more important to talk to them – to see if they understand why they’re doing it and to get a better grip of if they’ll continue returning cash to shareholders. You’ll be amazed how many companies are only doing it because “everyone else is doing it” without really understanding why. It’s hard to get confidence from those ones if they’ll proactively continue to improve capital allocation. Or take a really good mid-term plan, sometimes talking to them makes you realize there is absolutely zero substance behind what they’re claiming to achieve.
One thing to watch out for is not to make yourself look too hostile. Japanese companies are hypersensitive to activists. This is a problem if you have no intention of being an activist but come off too aggressively in a meeting. They might make it more difficult for you to get a follow-up meeting. It’s sad but there is an unofficial blacklist of funds that companies believed to be activists and it just makes life harder to do due diligence.
This is a little more technical and short-term risk-focused but it’s worth checking the balance of stock bought on margin vs short interest. You can look this up for individual stocks on websites like IRBank.net — In Japan margin loans typically need to be paid back within 6 months which can cause short-term selling pressure if the balance of stocks bought on margin is too high versus the # of shares short. You can get weekly data so you can also see how it trends running up to the quarterly earnings to see how much expectations might be baked in. This can cause quite a bit of volatility.
For brokers, I think SBI and Ichiyoshi are the main ones covering smaller names. I like Monex since they host a bunch of management presentations but this is unfortunately only in Japanese.
I also have a useful resources page on my Substack as well in case you find that helpful in any way.