Intro
I keep intending to research more Japanese stocks, I have only looked into two properly this year; Sekisui Jushi and Hikari Tsushin. I often get distracted by other countries/stocks.
With Japan there’s so much choice it can become a little paralysing. A lot of the best opportunities are also at the smaller end and don’t report in English. Despite how great translation tools are, I can’t risk full positions in something I cannot read. Because of this I’ve historically bought Japanese stocks in a basket approach (i.e. a dozen net-nets). I achieved nearly a 30% CAGR doing this over 3 years, but oddly it felt a little impersonal and dare I say boring.
Anyway, today’s article:
Context
On a train into London earlier this month, mildly seething at the lack of 5G or Wifi, I was reading that Japan is in the middle of a large, multi-year defence build-up. Last years’ budget saw a near 10% annual increase, with 4% this year. Looking into it since, I understand this is a structural rearmament programme rather than one-off spikes.
Historically, Defence spending was at roughly 1% of GDP, with a 5 year plan to double to 2% by 2027. Recent budgets have enabled the government to reach this benchmark earlier than planned, which is positioning Japan to soon become one of the top 3 or 4 global Defence spenders, up from 10th place currently.
The government’s own threat assessment frames the security environment as becoming “increasingly and rapidly severe”, citing China’s growing military reach, North Korean missile and nuclear development and nearby Russian activity. Those seem to be persistent/strategic conditions, so this appears to be a structural shift. Some recent headline snippets:
At first glance, the boat has sailed a bit on this theme as many popular Defence related stocks e.g. 7011, 7012, have done well recently. But I understand that Defence and industrial-related activity should remain high and likely rise through the next handful of years. Therefore my brain went straight to thinking about how I can ride this tailwind in some of the smallest, cheapest and more obscure names.
Basket Approach
Some of these are very small and don’t report in English, which as mentioned above, puts me off taking full positions. I’ve therefore decided to play this theme in a similar way to how I have with UK housebuilders: a basket approach.
These aren’t deep dives - and I have had to lean more on third-party research and translations than normal, so more than ever please DYOR. That’s why this is played as a basket to avoid any single-stock risk and omissions lost in translation.
As it happens, these stocks are all down between 18%-40% since February, as war-premium expectations have cooled a little, potentially offering favourable entry points.
Now onto the stocks: a collection of asset-backed, under-followed Japanese companies with differing degrees of exposure to a multi-year procurement cycle.
