In recent years, Japan has been at the center of a debate between value and growth investing. Following the COVID-19 pandemic and Russia’s invasion of Ukraine, inflation surged globally, prompting higher interest rates, particularly in the United States. However, Japan remained an exception, maintaining zero interest rates until the surprising rate hike in July 2024.
The recent focus on value stocks
Since 2021, investors have shifted their focus to Japanese value stocks, such as banks and commodity companies, driven by the weak yen and rising global interest rates. However, Richard Kaye argues that this trend is temporary. As interest rate disparities between the U.S. and Japan narrow, growth stocks are likely to regain prominence.
The role of family-owned businesses
A unique feature of Japan’s economy is the prevalence of family-owned businesses, which account for about one-third of publicly listed companies. While investors often avoid these companies due to concerns over succession and governance, they provide significant competitive advantages. Many of these businesses have demonstrated extraordinary longevity, thriving through centuries of economic and social upheavals.
OBIC: A model of consistent growth
Among these businesses is OBIC, a leader in enterprise software. With annual sales growth of 6.36% and 30 consecutive years of operating profit growth, OBIC exemplifies how a strong corporate culture can drive sustainable success. According to Richard Kaye, OBIC’s focus on employee welfare and visionary leadership has been instrumental in its achievements.
Keyence: Innovation and leadership
Another standout is Keyence, a manufacturer of industrial automation equipment. With an operating profit margin of 51.1% in 2023, Keyence represents efficiency and innovation. Its “fabless” structure, outsourcing production, and reliance on highly skilled engineers have enabled it to maintain a competitive edge in a high-tech industry.
Shifting towards a growth-driven market
Kaye believes that Japan’s improving economic outlook presents a unique opportunity for high-quality growth companies. These companies, characterized by longevity, significant entry barriers, and a robust corporate culture, are better positioned for the future than short-term value stocks.
Conclusion
The cultural strength and strategic vision of family-owned businesses like OBIC and Keyence underscore Japan’s readiness for a new phase of economic growth. Long-term investors will find these companies offer a pathway to sustainable returns.
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