Seismic shift in Japan's workforce

Rightly labelled as inflexible and hamstrung by high fixed costs Japan's economy and companies have historically found themselves hostage to the prevailing winds of global trade - not a good characteristic to boast in the most severe global GDP crunch ever witnessed.

However, on a recent trip to Japan Jamie Jenkins, manager of the F&C Japanese Equity Fund, found plenty of evidence to suggest that things are rapidly changing for the better. "Corporate Japan is getting increasingly switched onto the benefits of being flexible with regards to costs - a situation engendered in large part by a seismic shift in the structure of the workforce", he said.

The rise of the temporary worker is fundamental according to Jenkins as, unlike their more or less immovable permanent counterparts, they enjoy relatively few employment rights. Whereas once the Japanese workforce was dominated by the job-for life ethos it is now estimated that around a third of workers fall into the temporary bracket.

"In previous downturns Japanese profits have crumpled under the strain of collapsing exports and global demand", Jenkins continued. However in this downturn, he has identified a growing number of Japanese companies remaining close to breakeven or even trading profitability despite orders being down 40%, 50% or even 60%.

Jenkins' conviction in a number of his fund's holdings was firmly reinforced in June. Sumitomo Electric Industries for example, has adopted an innovative approach to cost control. Its overall headcount has been reduced by around 15% in the last year or so and it has recently relocated some of its auto related operations from Eastern Europe to North Africa, where wages are significantly lower. Rohm is another firm that has successfully worked to shed its historical shackles. Following its acquisition of OKI Semiconductor Rohm's management team has cut around a third of their 20,000 employees.

By introducing a radical review of costs, including cutting temporary staff, reducing overtime, bonuses and R&D expenses, Amada - one of the world's leading machine tool manufacturers - will be close to achieving breakeven even though sales have declined by 50% from their peak. "The increased emphasis of these companies on cost control does look to be part of a wider trend, which can only be good news for investors in Japan. Panasonic, Sony and TDK are just three more of the better known Japanese firms that are implementing aggressive cost cutting programmes", Jenkins reckoned.

He believes that those companies with a cost conscious mindset have been well placed to fully benefit from the upturn in activity witnessed in the first half of the year. This situation is yet to be fully reflected in many shares that continue to offer value.

"For the second half of the year we believe that Japan's increasingly flexible and cost conscious companies are in better shape to weather the downturn and well positioned to grow profits as and when the cycle moves into an expansionary phase", concluded Jenkins.