Made in Japan

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Japan’s image is often futuristic: visitors encounter talking toilets, conveyor-belt sushi, and vending machines proffering almost everything.

Beyond such curiosities lies an important investment story. Japan’s shrinking workforce has forced its companies to use technology to solve problems that many developed economies are only now starting to confront, as their societies age: too few workers and the need to produce more with less.

Close to three in ten people are aged 65-plus, and the population has fallen for 14 straight years. That is a drag on domestic economic growth. But it has also created an unusually demanding home market for automation, precision manufacturing, and energy efficiency. In the age of AI, that experience is becoming more valuable, not less. 

Robots: doing the jobs no one is left to do

Japan has one of the world’s largest industrial robotics markets. The next opportunity is not simply to install more robots, but to make them useful in less predictable settings. For example, Fanuc is combining its motion-control expertise with Nvidia’s simulation and physical-AI technology, including tests of ‘imitation learning’, in which robots learn movements and visual information from skilled workers. Physical AI broadens what robots can do; Japan already controls important parts of the machinery that will turn that advance into practical use.

The opportunity extends beyond the robot. Leaks, excess pressure, and idle machinery waste energy in factories. SMC’s air-management pneumatic systems monitor flow, pressure, and temperature, then reduce supply during standby periods.

Fanuc and SMC capture two sides of the same structural need for improved efficiency: more flexible automation and lower running costs.

There are threats. Notably, Chinese competitors gained ground in their domestic industrial robot market in 2024, so Japan cannot rely on reputation alone. But Japanese companies often enjoy a durable advantage in continuous improvement, service, and system integration. 

AI’s less obvious beneficiaries

AI offers another example of Japan’s importance further down the supply chain. More powerful chips require increasingly complex manufacturing. Tokyo Electron’s 3D-integration technology facilitates the precise combination of logic and memory, increasing the processing power and speed of chips. It also lowers power consumption. Japan may not build the world’s leading consumer AI model, but companies such as Tokyo Electron help make the chips on which those models depend.

The AI opportunity is partly cyclical. Semiconductor capital spending can be lumpy and expectations are high. The key, for investors, is to separate businesses benefiting from the rising complexity of chip manufacturing from those relying mainly on the next upswing in spending. This is where Japan comes into play, since it has companies grappling with this complexity. 

Japanese companies also have much to offer the world in climate technology. For example, they have expertise in the use of hydrogen and ammonia as low-carbon sources of electricity. 
ammonia as low-carbon sources of electricity. 

Corporate Japan also has technologies that help enable a greener global economy to operate. For example, Hitachi Energy is a global leader in smart grid technology. Without such systems, power grids could become unstable when sudden changes in wind power threaten to upset the essential balance between power in and power out.

Rewiring the boardroom

These technologies become more valuable when management allocates capital well – towards promising opportunities and away from low-returning divisions. Governance reform encourages this – the Tokyo Stock Exchange has pushed companies to improve returns. Meanwhile, cross-shareholdings, where different companies hold stakes in each other, creating a base of undemanding shareholders, continue to be unwound.

Better boards, clearer return targets, and greater pressure on low-return assets can change how companies invest and return cash. Japanese shareholder returns have risen every year since 2020. But the next phase of Japanese shareholder capitalism should be judged less by the number of buyback announcements and more by whether companies can lift future returns on capital.

The stronger opportunity may lie with companies that reinvest released capital at higher returns, while also improving cash returns to shareholders. Meanwhile, in a world of increasing debt, Japan’s low-debt balance sheets stand as a welcome anomaly.

Many happy returns

Japanese shareholder returns keep climbing

Digging the moat

When considering which companies can create a moat to defend against competition, investors must look for those that offer precision manufacturing, intellectual property, tailor-made solutions for clients’ factories, and manufacturing know-how. Ironically, Japan’s increasingly elderly population has forced its companies to become good at the modern technologies of today’s brave new world. That’s why Japan is so interesting to investors.