Lim Chow Kiat, CEO of GIC, has recently spoken at GIC’s 40^th Anniversary event in Japan. He explains why Japan remains a key focus for GIC in a fireside with Ken Sugimoto, Head of GIC’s Japan office.

KEN: I joined GIC about 5 years ago and have seen our Japan office grow to 12 investment professionals, covering the real estate markets and cross-asset class opportunities. We also have investment managers and analysts covering other asset classes from our Singapore office. Chow Kiat, can you share more about GIC’s approach to Japan?

CHOW KIAT: GIC has been investing in Japan for over 30 years, with a solid track record across all asset classes. We started with Japanese equities and bonds in the 1980s, and later expanded into real estate and private equity in the 1990s, and infrastructure and more bespoke capital solutions in the 2010s.

Our on-the-ground presence started much earlier than other foreign investors. That has equipped us with valuable market knowledge as well as long-term relationships with policymakers, investee companies, fund managers, and investment and banking institutions in Japan. We are grateful to our partners as they have helped GIC to source deals, navigate and invest in Japan through the market cycles over the years. In fact, in real estate, we are one of the largest foreign institutional investors in Japan, with our portfolio spanning across all sectors including office, retail, residential, hospitality, industrial and logistics.

Japan is a big and modern economy. There are a lot of world-class companies and products in various industries, particularly specialised sectors such as precision engineering, chemicals, electronics, and robotics, among others. Japan remains a significant part of our global portfolio at 8%.

KEN: Japan is often viewed to have specific challenges of deflation and aging demographics, which lowers its potential growth outlook. In 2020, Japan saw a GDP growth of -5.8%, its lowest over the last 60 years. What is GIC’s view on Japan’s investment outlook?

CHOW KIAT: Japan, like many markets around the world, experienced one of the worst recessions in 2020, as the Covid-19 crisis resulted in widespread lockdowns to stem the spread of the virus. We expect growth to improve over the next few years given the broader global recovery, Japan’s rapid vaccine rollout (close to 80% were fully vaccinated by early December, one of the highest in the world and up sharply from less than 5% six months ago), and continued support from accommodative fiscal and monetary policy. At the same time, significant uncertainties remain, such as the emergence of new variants like Omicron, which could potentially disrupt economic activity.

As a global long-term investor, our focus is on finding investments that can compound returns for the long term. We believe these investments can be found along these themes:

First is industry consolidation. A number of industries are still more fragmented in Japan relative to many other developed countries. This is both a risk and an opportunity. It is a risk because the scale may not be big enough for some of these companies to compete globally. Consolidation or companies coming together can help address this issue and turn it into an opportunity. Indeed, our Japan team has been working with some companies on opportunities of consolidation, restructuring spin-offs, and various other capital solutions to help them be more competitive domestically and globally.

Second is corporate reforms. Ever since Abenomics, we are seeing Japanese companies getting more focused on improving capital efficiency. In fact, despite the Covid crisis, many firms have healthy balance sheets with high levels of cash and generous interest coverage ratios. Hence, there are considerable opportunities for them to optimise their balance sheets and increase shareholder value. Already, more companies are looking at divesting non-core assets, or buying back subsidiaries to pursue growth, which can be value accretive due to low-cost leverage.

Third is to recognise that many Japanese companies are strongly and uniquely positioned in consumer and high-tech products to cater to the global digitalisation trend. Many of these technologies or products are difficult for other countries or companies to replicate. As long-term investors, we seek to identify and own some of these assets to benefit from that unique value creation.

Next is intergenerational business succession in both public and private companies. With newer generation leaders more open to restructuring and growth, and partnering with like-minded long-term investors, these businesses have the potential to expand even faster and bigger.

Tourism remains a key focus for GIC. We have been bullish about this sector for many years now, and want to invest more. While COVID has been a big challenge, we are confident that tourism will recover strongly.

Then we have sustainability. Japan’s 2050 net zero emissions target presents considerable growth potential in the renewable energy sector. Japan also has good sustainable technologies, especially in energy saving and recycling. Marketing their sustainability efforts and engaging global rating agencies pro-actively can help gain global investor confidence. We see attractive prospects to support Japanese companies in their transition or investment in green assets.

KEN: How should Japanese companies go about realising this potential?  

CHOW KIAT: One good way is to work with partners who can provide long-term capital and have a good understanding of the business fundamentals. As companies seek to restructure, transition, scale up or expand geographically, it can be beneficial to have a supportive investor with a global perspective, cross-asset class flexibility and expertise, and strong networks. This is all the more important in an increasingly competitive and rapidly changing world.

For GIC specifically, our well-established presence in Japan and Asia has allowed us to serve as a bridge with the Americas and Europe. We actively share our global relationships, expertise, and insights on impactful issues, so as to add long-term value to our investees and investments.

We continue to see significant bottom-up opportunities across the public and private markets, and want to do more by growing our partnerships and platforms in Japan.