November 2018 FOR PROFESSIONAL INVESTORS ONLY On the ground in Japan Ruth Nash, JOHCM Japan Fund & JOHCM Japan Dividend Growth Fund

“Those of you in window seats on the right side of the plane there on the leg of his Asian trip and that half of the might catch a view of Mount Fuji in a few minutes”. The lifts had been reserved for him and the huge security detail Captain’s words prompted everyone to scan the horizon for which accompanied him. The hotel was so full that they were signs of the famous mountain. It always surprises me that Fuji warning of a 30-minute wait for breakfast next morning. And is so big that, when weather conditions are right, it sticks up inflation is definitely starting to hit the hotel sector, as room above the clouds. Anyway, cloud cover was too thick and there rates and even breakfast prices had risen by over 10%. was no sign of it. Japan Inc back on track after natural disasters I was on my way to Japan to spend a few days visiting As usual, I saw a mixture of companies, from sectors such companies. Usually I do this twice a year, but this was my first as construction, services, technology, manufacturing and visit of 2018. This is because, after a slow start in January, (unusually for me) pharmaceuticals. A couple of themes stood when corporates were initially confused by the implications of out. MiFID II, we have had huge numbers of them visiting us in this year. And, particularly for the larger companies, Firstly, Japan’s series of natural disasters over the summer the opportunity to meet the top management is too good to affected production and logistics for a number of companies, miss. Indeed, just before I left, I had a one-on-one meeting but things are finally back on track. For one or two, however, with the president of Hitachi. However, particularly in the Japan the implications were more severe. Tokyo Rope saw the roof Fund, we own several companies based in the regions, which of its Osaka plant damaged by the earthquake, together with are more reluctant travellers. The plan was to do a reasonable a quantity of its stock. This will be covered by insurance, but amount of travelling over the course of the week. for now the company has just incorporated the losses from the damage into its numbers. Toyobo, an Osaka-based specialty Life beyond analyst notes and annual accounts chemicals company which we hold in the JOHCM Japan Fund, Yet our trips to Japan are not just about meeting companies. suffered a fire at the plant which makes fibre for airbags. This They are also about observing sentiment and monitoring happened when the electricity, which had been cut off during changes that don’t make the pages of an analyst report. the typhoon, came back on again. The president explained Before starting my meetings, I headed for . This area in that he had spent the past two months securing supply of fibre Tokyo is known for the famous pedestrian crossings, at which (there are very few global manufacturers) to make sure that thousands of pedestrians stream across a big junction from the supply chains of the automakers were not affected. Toyobo, lots of different directions every few minutes. Unfortunately, too, has incorporated the cost of the damage into its forecasts, it is now so famous that every tourist in Tokyo wants to film but not the insurance claim. themselves walking across it. Secondly, manufacturers dependent on the smartphone My reason for going to Shibuya was to check out the progress replacement cycle are having a tough time. The situation for of building works at the station. We own shares in several those reliant upon the semiconductor cycle is more nuanced. Tokyu Group companies. The Tokyu Group is midway through The share prices of such companies have collapsed. However, a massive redevelopment of the area, which, despite its I visited two companies, one of which polishes silicon wafers worldwide reputation, was somewhat down at heel. The and the other which supplies chemicals for etching the fine latest new building there, , opened a couple of lines onto semiconductors. Both said that the market remains months ago and it was good to see that the restaurants were tight, that their customers have asked for long-term contracts very busy on a Monday lunchtime. The stream in question is because they are concerned about securing supply of wafers not quite the babbling brook implied by the name, but there and that they are continuing to put through price increases. was no shortage of diners happy to sit looking out at it (and For the manufacturing sector as a whole, higher raw material into the backs of the apartments on the other side of it – and energy costs were a factor in the first half of the fiscal year, there is clearly still some work to be done). Next door, progress but in most cases companies will be passing at least some of on Shibuya Scramble Square, a mixed office and commercial those costs onto customers, albeit with some delay. Meanwhile, building which will have a roof garden from which to view companies in the construction industry and related suppliers remain very upbeat. Order books are full, pricing remains firm the Shibuya crossing, was well underway, as were a series and they expect good conditions to last beyond 2020. of overhead walkways to connect all these new buildings. It is difficult to convey the extent of the Tokyu Group’s plan for A tight labour market, a tight property market the area around ; it is completely transforming it. And it is being rewarded by seeing the big tech companies Evidence of the labour shortage is everywhere. Convenience move in. Shibuya has always had a strong tech presence, stores in Tokyo have foreign students behind the counter. Reception desks at Tokyo-based companies are now a thing of but a shortage of office space meant that the bigger players the past. The visitor turns up and is faced with a telephone and located elsewhere. Now Google has signed up for one of the an internal directory for the various departments. Offices are new buildings. looking smarter in Tokyo (several companies said that it was When I checked in at the Imperial Hotel, there was a slightly important to offer a nice working environment to attract staff). odd notice about additional security measures in place. It After a couple of days in Tokyo, I set out for a day in Osaka. I 2018 in Japan – November On the ground turned out that Mike Pence, US Vice President, was staying started with a meeting with Daibiru, the Osaka-based real estate

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I stayed on for another Time forbook andbed earnings. 12x than less on trades Albis be. will ever there sure not I’m freshness, with obsession Japanese the given Indeed, retail. regions such as Toyama, there is as yet little threat from online In defensive. relatively supermarkets makes believe we which exempt, be will year,food next but 10% to 8% from increase store was impressive. equally Theconsumption taxisdueto Albis The beautiful. were displays the and clean bright, was It items. delicatessen and fish fresh of displays great with store, nice really a was which Mart, Orange at lunch had We actually which Albis has recently acquired. The other was an Albis store. stores four of group of a Mart, Orange two an was One out stores. their check to managed I cheaply. players local other acquire to M&A of use making is and consistently margins and profits sales, grown has it ago, years few a supermarkets focus on to business wholesaling original its abandoned Having is famous. 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No tourists. foreign with popular chain, Inn which is aimed at business travellersDormy but is now becoming very the by operated hotel a in stay to chose I supermarket company we bought for the Japan Fund this year. local a Albis, visit to was reason main Toyamathe to and visit first my was This coast. Japan of Sea Toyama,the to on train I staydidn’t overnight in Osaka, but instead caught an evening at least another 2-3 years. win for Osakawould extendthecurrent construction boomfor forthcoming announcementofthesuccessful candidatecity. A related companies and Toyobo) were very excited about the construction- our of two visited I Daibiru, as well (as Osaka companies in but me, to this mentioned even had nobody that the host to 2025 World Expo. Tokyo bid is so focused on the Olympics in 2020 Osaka’s around excitement of lot a also was tourism Osaka’sThere favourable. very seems accommodate outlook longer-term the to boom, hotels into turned being offices older some with And years. three next the least at for therestarting to rise. But is no new supply coming in stream just are rents recovery,so its Tokyo in behind years of couple a is It tight. very currently is market property Osaka the that company we own in the Japan Fund. The spokesman explained definitely there.definitely in value most is it view,frombut shrouded be the can stocks domestic our peak, famous the Like top. snowy signature its there it was, Mount Fuji, almost floating above the clouds, with As we pulled up through the clouds on our way back to London, earnings are strong and dividend support is good. low, are valuations meantime, the In appreciated. be to start become less attractive, the merits of these niche businesses will economy. Perhaps, as some of those big global themes start to Japanese the of strength underlying the in interest to little have seem and themes global big, play to want to appear who ignored by a market which has been dominated by investors being are its companies our that frustrating of is It model. qualitybusiness the given cheaply, too trading was question in found myself concluding in almostevery casethatthecompany I notes, visit company my up Writing trip. fascinating a was It Hidden domestictreasures of incredible customer service. exercise they repeat many times every day. Japan is still a land an it’s But despatched. ever had they plane first if the as was this was It two. with then hand, one with first waved, then strict in order ofseniority moved andboweddeeply asit away.stood, They it of charge in been had who workers airport me pushedbackfrom thestandtotaxi totherunway. The day,beside next plane the the Airport as Haneda watchedAt I sleep. For this, I paid ¥5100, which is about £35. night’s excellent an had and bunk my into wriggled then late, until reading up sat I comfortable.remarkablywas capsule my the library about it, despite the bar and background music) and guests were extremely well-behaved really(it does have something of other the lovely, were staff The experience. pleasant room. It wasroom.It all-round an you from therest ofthe curtain separatesA small retreat into their capsule. when tired,feel eventually they and, sofas large a with book on one of the book shelves, settle down are invited to browse the Inn in Toyama. Customers bathroom attheDormy my of size the now was “room” My bookshelves. located in amongst the are tiny woodencabins and hostel. Thebeds combination of library bizarre a is This Bed. and www.johcm.com

On the ground in Japan – November 2018