Japan's Investment Strategies: Calculated Or Cautious?

Japan's business environment is considered relatively low-risk, with a stable political system, a strong purchasing power, and a highly skilled workforce. However, foreign investors face challenges such as a historical reluctance towards mergers and acquisitions, weak corporate governance, inflexible labour laws, and a regimented system of labour recruitment. In addition, Japan's economy is vulnerable to natural disasters, has huge public debt and large public deficits, and is highly dependent on energy imports.

Japan's ageing population

The Japanese government has introduced various measures to address these challenges. These include encouraging older people to remain in the workforce, promoting immigration to fill labour gaps, and developing and deploying technological solutions. Japan's ageing society has also led to a shift in consumption patterns, with a focus on healthcare, eldercare, and remote monitoring solutions.

The ageing population has also had an impact on housing and land ownership, with an increasing proportion of land having unknown ownership due to unregistered transfers of ownership through inheritance. Blockchain technology has been proposed as a solution to this issue, with several startups offering blockchain-based solutions to track real estate transactions.

Additionally, Japan's ageing population has influenced the development and deployment of autonomous vehicles and robotics. There is a growing demand for self-driving cars, buses, and taxis, particularly in rural areas facing labour shortages and an ageing population.

The government has also introduced initiatives to enhance the sustainability of social security systems, including pension, medical insurance, and long-term care insurance. These measures aim to address the challenges posed by the increasing number of senior citizens and the declining workforce.

Overall, Japan's ageing population has far-reaching consequences for the country's economy, society, and policy landscape. The government and private sector are working together to address these challenges and find innovative solutions.

Geopolitical tensions

Japan's geopolitical tensions with China, North Korea, and Russia have had a broadly positive impact on its economy, with Western investors moving strategic industries and supply chains to the country. Japan has benefited from uncertainty over trade restrictions, and has been de-risking its critical supply chains since 2010, when its rare earth imports from China were blocked following an escalation of tensions over the disputed Senkaku/Diaoyu Islands.

Japan has also emerged as a strategic friend of the West, with Taiwan chip firms moving their businesses to the country as they decouple from China. However, the exposure of Japan's large businesses to the Chinese market through manufacturing and production investments creates a risk to the Japanese economy.

Japan's defense priorities are largely shaped by geopolitical tensions, with external threats from North Korea and China, and internal challenges such as human resources and technological upgrades. Tokyo is developing safeguards to protect its interests, including new operational doctrines, the planned joint operational headquarters, and reviewing the bilateral command cooperation mechanism with US forces.

Deterrence capabilities within the broader region remain a priority, with potential conflicts related to North Korea, the Taiwan Strait, and territorial disputes in the East and South China seas. Japan will also need to consider what counterstrike capabilities it will invest in to disincentivize provocations, including physical capabilities like Tomahawk missiles, and continued development of cybersecurity and general cyber capabilities.

Corporate governance

One key aspect of Japan's corporate governance reforms is the focus on board independence and diversity. Over 90% of companies now have outside directors comprising more than 30% of their boards. This shift has led to higher dividends and share buybacks, exceeding profit growth and providing a significant boost to Japanese equities. Additionally, the unwinding of cross-shareholdings, where companies hold stakes in each other, has been a notable change. This practice was criticised for contributing to poor corporate governance and low company transparency.

The reforms also emphasise the importance of cost of capital and stock prices, with the TSE urging companies to improve dialogues with shareholders and enhance disclosures. However, there is a need for improvement in the quality of disclosures, as companies need to appropriately assess and address the reasons for current valuation levels.

The success of Japan's corporate governance reforms relies on companies making changes from the bottom up, with independent and experienced directors who can provide proper oversight and ask the right questions of management. While the reforms have positively impacted shareholder returns, their effect on corporate profitability and the national economic revival is less clear. Some studies suggest that the reforms have improved corporate performance, while others indicate no significant impact.

Overall, Japan's corporate governance reforms have been a work in progress, with a shift towards a more modern and investor-friendly approach. The country's efforts to improve corporate governance have generated significant market interest, and it remains to be seen whether these changes will lead to the desired economic outcomes.

Labour laws

Japan's labour laws are sourced from government ordinances, acts, and other regulations. These laws set forth regulations regarding working conditions, wages, hours, holidays, contracts, and other essential employment terms and conditions.

Types of Employment Contracts

There are three main types of employment contracts used when hiring employees in Japan:

• Permanent and fixed-term employment contracts: Permanent contracts are based on lifetime employment, with employees serving the company until their mandatory retirement age (usually 55-60). Fixed-term contracts specify a legal period of validity, typically one to three years, and are standard for companies requiring skilled employees.
• Part-time employment contracts: These are for employees who work fewer hours than full-time employees and are not eligible for certain benefits such as regular pay hikes, retirement allowances, and bonus payments.
• Dispatched worker contracts: These involve a third-party staffing agency hiring workers and dispatching them to client companies temporarily, with a one-year limitation on dispatched work.

Obligations and Rights

Both employers and employees have rights and obligations regulated by labour laws. Employers must adhere to all relevant employment laws, including those related to minimum wage, working hours, overtime, compensation, and leave policies. Employees should understand common global HR compliance to avoid legal repercussions.

Working Hours and Overtime

The standard working hours for employees are 40 hours per week, with some businesses allowing 44 hours per week and a maximum of eight hours per day. Employers must compensate employees for overtime work at higher rates than regular hours.

Minimum Wage and Compensation

The national minimum wage in Japan differs based on prefectures and industries, with no standard minimum wage for all 47 geographical jurisdictions. If an employee is subject to two different minimums, they are entitled to the higher amount. All employers must pay employees in the official currency, yen (¥).

Employee Benefits and Social Security

Japan's labour laws mandate certain employee benefits and social security systems. The health insurance scheme, for example, typically has patients paying 20% of medical costs, with the scheme covering the rest. The scheme also provides sickness or injury benefits equivalent to 60% of their standard monthly remuneration for up to 18 months.

Other benefits include:

• Maternity benefits: 60% of the standard monthly remuneration, divided into two instalments before and after childbirth. There is also a lump-sum birth and nursing grant of 300,000 yen.
• National pension scheme: Covers all residents aged 20-59.
• Employees' pension insurance scheme: Covers employees in the private sector.
• Child allowance scheme: Includes 5,000 yen per month for the first and second child and 10,000 yen for each additional child.
• Employment injury benefits: Provides benefits for workers who sustain injuries, become ill, disabled, or die due to work-related accidents.
• Unemployment benefits: The employment insurance scheme covers individuals in companies with one or more workers, excluding those under the Seamen's insurance scheme or employed after 65.

Vacations and Paid Time Off

Paid vacations and unpaid leaves are important in Japan's labour laws. The number of paid annual leaves granted to an employee is influenced by their duration of work. There are currently 16 public holidays, and labour laws do not mandate sick leave, although companies can provide leave policies to cover this. Female employees are provided with 14 weeks of maternity leave, while employers must provide concerned employees with four weeks of paternity leave. Labour laws also mandate five days of bereavement or condolence leave for every employee.

Termination and Severance

Employers may only dismiss employees on reasonable grounds, and the reason for termination must be mentioned in the work rules. Employers are required to provide at least 30 days' notice before termination (except in specific situations) and pay wages due within seven days of termination. However, there are no statutory severance pay requirements in Japan.

Discrimination and Equal Opportunity

Japan's labour laws include protections against discriminative treatments based on nationality, creed, social status, gender, association with union activities, or taking childcare or nursing care leave. There is also a prohibition against unreasonable differences between full-time permanent employees and non-regular employees.

Health and Safety

Primary legislation addressing health and safety in the workplace includes the Labour Contract Act, the Labour Standards Act, and the Industrial Safety and Health Act.

Yen depreciation

The Japanese yen has been steadily depreciating since the beginning of 2025, hitting a 34-year low. This is due to a few factors:

• The delayed prospect of rate cuts by the US Federal Reserve and the strength of the US economy.
• The macro-environment: the yen tends to appreciate when there is a high risk of recession and low yields, but the opposite has been true recently. There has been resilient growth in the US, with growth sitting at around 3% despite high yields.
• The Bank of Japan's monetary policy meeting in April sent a signal that it does not react directly to the FX markets, and that its primary policy target is sustainable inflation.
• The extension of a tax benefit for retail investors, allowing investment in securities, has seen many retail investors invest in foreign equities, creating a net outflow to other markets.
• The Bank of Japan's negative interest rate policy, which ended in March 2025, and the removal of the cap on 10-year Japanese government bonds.

The depreciation of the yen has a mixed impact on the economy. On the one hand, it has boosted exporters' profits by making their products cheaper to overseas buyers and encouraged a record influx of foreign tourists, whose spending supports local businesses. On the other hand, it has sharply raised the cost of imports, particularly food and fuel, putting a strain on household budgets.

The Japanese government has expressed concern about the yen's depreciation and is prepared to intervene. The two main levers they can pull are buying up the yen or raising interest rates. However, the large gap between Japanese interest rates and those elsewhere is likely to persist, and the Bank of Japan's ultra-loose policy is expected to remain.

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