My recent trip to Japan provided insight into the workstyle reforms being pursued in the labor-challenged nation, but didn’t dissuade me from my view that the country faces challenges. That means active management is essential to Japanese equity selection.

As background, in September 2016 Japanese Prime Minister Shinzo Abe held the first meeting of the Council for the Realization of Work Style Reform to address a number of labor-related issues, including the need to change working conditions and hours.

I witnessed how important this is on my recent trip to Japan, where, as a global research analyst covering real estate, utilities, and infrastructure-related companies, I met with the Japanese Federation of Construction Contractors and Ministry of Land, Infrastructure, and Tourism, among other organizations.

Officials from these organizations spoke to me about the country’s challenging demographics. Japan has one of the most rapidly aging populations in the world, with individuals ages 65 and older accounting for more than one-quarter of the population.

Given the shortage of labor, construction projects are written assuming a six-day work week. And the wage is poor relative to other industries. Clearly, the Japanese have to re-think how they employ and pay labor in the construction industry.

Immigration is not a viable solution. Japan has a relatively small foreign-born population: 1.6% versus 7.0% for the United States, 7.7% for the United Kingdom, and 9.3% for Germany, according to the Organization for Economic Co-Operation and Development (OECD) as of 2013.

And the Japanese like it that way: They’re proud that they have limited crime and civil unrest relative to other developed nations, and they attribute that to limited immigration.

You can visit, but you can’t stay.

While the country’s foreign-born population grew by about 150,000 to 2.3 million in 2016, according to the Ministry of Internal Affairs and Communications and Ministry of Justice, the influx of foreigners is seen by the Japanese as temporary. The government expects most foreign workers to stay in the country for only a short period of time. You can visit, but you can’t stay.

But how will Japan solve its workforce challenges if it doesn’t allow immigration? Speaking to the Japanese, it’s clear that they view automation as one potential solution. The question is, will it happen?  Certainly, Japan has some of the most cutting-edge technology in automation, and some very strong Japanese companies export these solutions all over the world.

But I’m not certain to what extent that technology is being leveraged at home. I visited the 2020 Summer Olympic site, for example, and there was a significant opportunity to increase the level of automation employed onsite.

That speaks to why active management is so important in Japanese equity selection. What happens if the Japanese fail to adequately automate while maintaining a bias against immigration? At some point, I would expect to see the profitability of Japanese companies decline, ultimately affecting Japanese equity returns.

In such an environment, it will be essential for investment managers to use fundamental, on-the-ground research to discriminate between those Japanese companies that are struggling and those that can potentially outperform.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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