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Japan's Great Wave of Change

In Japan, crisis often sparks accelerated change and innovation. Praveen Kumar, manager of Baillie Gifford Shin Nippon, talks about the upstarts making inroads...
Baillie Gifford
Last update 02 December 2020

This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

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Revolution has come to Japan. The hanko name-stamp, used for centuries to sign and certify even routine personal and business documents, is finally on the way out. This is great news for CloudSign, the digital certification service launched by online legal portal Bengo4.com, a Baillie Gifford Shin Nippon holding.

A pocket-sized cylinder carved with personalised name characters, the hanko became a public health nuisance in the pandemic. The need for real red ink to formalise transactions made remote working difficult, prompting review of the laws requiring its use.

“The possibility of the hanko not being around in 12 months’ time has boosted CloudSign, a market leader in certification,” explains Kumar. It managed to treble revenues in April compared to the previous year.

Kumar sees the “shock” of coronavirus accelerating the “shedding of traditional paper-based business practices”. But the demise of the hanko symbolises greater readiness to embrace the new.

Japan has been slow to capitalise on cheap computing power, cloud infrastructure and advanced software technologies. Kumar sees changes now underway as a “third revolution”, following industrialisation in the late 19th century and the post-war consumer boom.

“Japanese companies are geared towards trying to survive and retain employees rather than to grow. Working practices have been stuck in the past.”

Shin Nippon is focused on a new wave of aggressive, nimble and flexible companies. Coronavirus, Kumar says, has been “an opportunity for them to accelerate the pace of disruption and exploit new opportunities.”

On the consumer side, one beneficiary of lockdown is Demae-Can, the country’s top online food delivery service. The market is still “very immature”, Kumar says.

“Demae-Can was already in a strong position. Line, the country’s most popular mobile messaging app, recently increased its stake in Demae-Can from 20 per cent to 60 per cent, injecting a significant sum for growth investment. If Line’s 83m monthly active users in Japan want to order food they are channelled through Demae-Can. Growth in orders has accelerated during the crisis.

Shoppers steering clear of Japan’s pristine malls and department stores also help Kumar’s final example, the subscription-only cosmetics retailer Kitanotatsujin. This innovative company provides high-grade beauty and wellbeing products and relies on an AI-assisted understanding of its customer base to refine its in-house advertising and marketing activities. Profits increased 84 per cent year-on-year in the first quarter of 2020.

Now Kitanotatsujin’s biggest challenge is meeting demand for star products such as the Hyalo Deep Patch, which targets eye bags and laughter lines.

“Kitanotatsujin uses algorithms that can anonymise data and process customer feedback from Japan’s numerous make-up discussion forums. Its sophisticated AI can monitor responses to its digital ads, allowing it to fine tune the messages that achieve the highest sales for every yen spent on marketing,” Kumar says.

Kumar sees using AI to breed a stable of best-selling products as a challenge to the giant brands. “Traditional corporate Japan has no other options and no excuses. If they don’t embrace these new technologies and practices, it’s going to get tougher for them.”

Coming back to CloudSign, Kumar says it’s “growing like a weed” by short-circuiting old Japanese ways. As well as its usefulness as a hanko alternative, he commends it for “taking a short-term hit on profits to invest heavily in growing scale”. To him, the exciting companies are those readying themselves to compete in the Japan of the future, leaving tradition behind.

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