If we take a step further down the classification hierarchy, it is evident that the two largest industry groups are capital goods and automobiles & components. These are driven by three main industries: automobiles (carmakers such as Toyota, Honda, and Suzuki), trading companies & distributors (the five trading companies Berkshire Hathaway bought stakes in), and machinery (which are companies such as SMC, Fanuc, Komatsu, and Mitsubishi Heavy Industries). In other words, buying Japanese equities offers exposure to the global economy through industrial machines, trading in physical commodities, and cars. These industries are so unlike the red-hot AI related companies in the US, but nevertheless important companies for the global economy.
Japan’s largest companies and the hope of AI
The four largest companies in the Japanese equity market are Toyota, Sony, Keyence, and Mitsubishi UFJ Financial. Toyota remains the largest carmaker in the world with an annual revenue of USD 275bn, but its outlook has deteriorated with the widespread adoption of battery electric vehicles (BEVs). Toyota has so far been betting on hybrids and fuel cells, but the new CEO has recently admitted that Toyota has been too slow to buy into BEV technology and the company is now committed to catching up with the industry and in particular Tesla and Chinese EV makers.
Sony is a technology conglomerate spanning many different businesses such as gaming, music, imaging solutions, pictures (movie production), and electronic products such as TVs. While Sony is not growing at the same rate as US technology companies it is still one of the crown jewels of Japan with an annual revenue of USD 85bn and an operating income of USD 16.3bn.
Keyence is a lesser known, but innovative, company specialising in developing and manufacturing industrial automation and inspection equipment, such as machine vision systems for factory production and barcode readers. It generates around USD 7bn in annual revenue. This stock is one of the top stocks held by many of the ETFs tracking robotics and automation.The AI hype has not escaped the Japanese equity market and scanning this year’s best performing stocks, we find a Japanese semiconductor equipment company called Advantest, which is Japan’s leading manufacturer of automatic test equipment for the semiconductor industry. The stock is up 131% this year as of 11 July 2023 as investors are betting that the boom in semiconductors related to AI will also lift Advantest’s growth outlook. Since the Great Financial Crisis lows in February 2009 the total return in Advantest has been 23.1% annualised (including reinvestment of dividends), underscoring both the high growth and equity valuation expansion in semiconductors stocks, but also the success among Japanese technology companies operating in niche industries.