SPARX Japan Equity Small & Mid Cap Strategy Japan's Labor Market
Portfolio Manager
The current global environment is marked by increased geopolitical risks and lingering concerns over a potential downturn in the US economy. Despite this, the Japanese economy is poised to maintain growth, primarily propelled by domestic demand and a positive inflation cycle supported by rising wages. In 2023, the market was led by large-cap, banking, and cyclical stocks amid rising interest rates. However, with share prices climbing and a shift in US monetary policy, this trend may not persist. Instead, the spotlight is shifting to small-cap stocks, which are closely tied to domestic demand and have been overshadowed by large-caps, presenting a notable undervaluation. This shall create an attractive opportunity for investment in stocks with strong earnings growth potential. In response, I focus on selecting stocks that stand to benefit from inflationary trends, address the structural human resource shortages, and are positioned to capitalize on the resurgence of capital investments that have been neglected for some time.
My investment approach has long focused on companies set to benefit from Japan's shrinking domestic workforce. This month, I'd like to spotlight the human resources service providers that are well-equipped to succeed in this demanding labor market.
Japan witnessed the beginning of its workforce decline in 2020. Despite an aging population, the labor force had grown until 2019, bolstered by the increased participation of women and seniors. However, a plateau in participation rates in 2020, coupled with a sustained low birth rate, projected to hit a record low for the eighth consecutive year, signaled a downturn. Without a substantial increase in foreign labor, Japan's labor shortage would continue indefinitely.
At the same time, the share prices of companies providing human resource services have been subdued since the start of the year. Historically, these companies' stocks have commanded high valuations, mirroring the growing demand for talent acquisition over the medium to long term. However, in recent years, the industry has become highly competitive for jobseekers, as companies have aggressively ramped up their personnel and marketing expenses in anticipation of greater demand. This intensified competition is believed to be eroding expectations, with concerns over narrowing profit margins. Moreover, low entry barriers have seen numerous newcomers intensify this competition.
In response to these trends, I have been focusing on firms well-placed to benefit from the burgeoning market of young jobseekers. Historically, the market for fresh graduates was significant during the heyday of lifetime employment in Japan. However, as the mid-career hiring market has expanded, the relative significance of the youth employment sector has diminished. Despite the dominance of major media outlets, new entrants into this market are limited. It is likely one of the reasons why it has not attracted much attention.
Yet, there are indicators of growth in the youth employment market, driven by companies investing more in graduate recruitment through extended hiring periods and increased starting salaries. Young workers also tend to switch jobs sooner than in the past, often at lower salaries, compared to the mid-career market, which deters existing HR firms from entering this market due to perceived lower profitability. Nevertheless, companies with an established user base in related services could leverage their well-positioning for their market expansion, potentially realizing earnings growth with enhanced profitability.
Important Disclaimer
This content has been prepared by SPARX Asset Management Co., Ltd. (SAM) for information purpose only. Certain information contains economic trends and performance, however, SAM does not warrant the accuracy or completeness of such information, and accept no liability whatsoever for any direct or consequential loss arising from any use of this content. The views and opinions contained herein are based on then-current beliefs of the authors and are subject to change without notice. Furthermore, it should not be assumed that past performance is an indication of future results.
