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Ageing, shrinking Japan still a good investment

TOKYO (Reuters) - Has the sun set on Japan as the rest of Asia becomes the sole source of growth in the global economy?

BlackRock Japan Co. Ltd. President and Representative Director Head Hiroyuki Arita speaks at the Reuters Japan Investment Summit in Tokyo July 8, 2009. REUTERS/Issei Kato

The country’s economic situation is indeed dire.

Nevertheless, bankers and investors at the Reuters Japan Investment Summit said the country will remain relevant due to its growing financial ties with other countries in the region, its technological prowess, vast pool of untapped savings and reputation for stability, especially in the midst of the current economic crisis.

The world’s second-largest economy is expected to shrink 3.5 percent this year, one of the poorest performing economies in the region, and it will be the biggest laggard in Asia next year, according to Reuters polling.

The country’s population is likely to shrink by a third within 50 years while all of Asia’s will grow by a quarter, United Nations projections show.

No one doubted these significant challenges, but they still see value and opportunity in Japan.

“Compared with where Japan was in the past, I think Japan will find itself in a weaker position. But does that impact our investment activities? Not necessarily so,” said Hiroyuki Arita, president and representative director of the Japanese unit of BlackRock Inc, one of the biggest asset managers in the world.

“If you look at Japan, we have a very stable society. From the viewpoint of overseas investors, I think Japan is an attractive investment opportunity,” said Arita, who oversees about $51 billion in assets for Japanese investors.

Arita, who is also head of the portfolio management group in Tokyo, said advances in research on green technologies, such as solar cells and zero carbon emissions, will keep Japan a popular investment destination.

Indeed, BlackRock Japan has seen its overseas clients become net buyers of Japanese stocks since March, when a global equity rally began. These flows were likely driven by investors snapping up heavily discounted shares in a developed market that is deep and not strewn with banks struggling with illiquid securities.

BlackRock is a long-term investor, but even in the nearer term Naoki Kamiyama, chief equity strategist with Deutsche Securities in Tokyo, said he expected the Topix index .TOPX to climb to 1,000 in a year, up 10 percent from where it is now.


The stability of the yen, which strengthened to a five-month high against the U.S. dollar on Wednesday, is also attractive to investors as well as countries.

The Japan Bank for International Cooperation (JBIC), a government agency that has become one of the country’s main tools to protect its industries from the global recession, has been offering partial guarantees on yen-denominated debt issued by sovereign governments trying to raise cash in a tight credit environment.

Indonesia is very close to finalizing one such bond to raise $1.5 billion, and the Philippines is talking to Japanese investors about a $1 billion deal, Hiroshi Watanabe, president and chief executive of JBIC, told Reuters.

Watanabe said a few countries in Latin America and the Middle East were also interested in such samurai bond deals with partial guarantees from JBIC.

“The issue of samurai bonds is not only to provide yen to sovereign countries for trade financing but also to have an impact on the foreign exchange market,” said Watanabe, who was Japan’s top financial diplomat in the Ministry of Finance for three years until July 2007.

Despite China’s growing trade importance in Asia, he envisioned the yen remaining Asia’s top inter-regional trade currency. Through samurai bonds and currency swaps, such as the 1.5 trillion yen ($15.8 billion) line set up this week with Indonesia, Watanabe said Japan could settle trade with other Asian countries directly without having to use the U.S. dollar.

Increasingly close trade ties between Japan and emerging Asia and the Middle East are precisely the area where Patrick Gillot, head of Standard Chartered’s operations in Japan, sees an opportunity to provide more bank services to domestic companies moving more business to these areas.

“Companies want to make themselves less at risk and they will continue to look at Asia,” Gillot said. “We are looking more at how we can build a bridge from Japan to other countries where we have strength.” London-based Standard Chartered derives more than 70 percent of its profits from Asia.

Japan’s trade finance with China, India, Indonesia, South Korea, Singapore and UAE has grown about 13 percent a year from 2003 to 2008, he said. These six countries make up 40 percent of Japan’s trade.

Clearly, the cases against Japan’s economy are well-known and legion. For example, this week’s economic numbers were sobering. Private sector machinery orders unexpectedly plumbed a record low in value terms in May.

Standard & Poor’s also said last week that negative credit rating outlook revisions of Japanese companies outnumbered positive changes by a ratio of eight to one in the April to June period. The worsening trend in Japanese corporate credit quality continued for the fourth consecutive quarter.

Still, to write off the Japanese economy, which is in its worst recession since World War Two, as condemned to grow older and smaller overlooks its importance as a linchpin in Asian trade and a mature, stable market.

“In terms of diversification, you cannot ignore Japan,” said BlackRock’s Arita.