CC Japan Income Growth Trust PLC

The NAV per share of CC Japan Income & Growth Trust rose by 3.80% in August, whilst the share price rose 3.83% and the Topix TR Index rose 2.72%, (all returns on a total return, sterling adjusted basis). As can often be the case during earnings season, volatility was elevated, though this period was exacerbated by yet another chapter of the market's intense love-hate relationship with the potential for return on AI investment overlaid with rising global bond yields.

This quarter's earnings for listed Japanese equities delivered the strongest revenue and recurring profit growth of the last 20 years, save for the aftermaths of the financial crisis and COVID. Whether one believes in the longevity of the capex boom or not, the fact is that there are many companies that are being paid cash today for their services. Japan plays a crucial role in the technology supply chain, often adding value through niche precision manufacturing methods or materials science applications. Less of the corporate value today is contingent on the AI products themselves generating an economic return than it is for, say, the hyperscalers. Hyperscaler capex was c.$40bn in 2020, and consensus has it at over $1tn a year for 2027-2030, a stark reminder of the scale of investment we are dealing with.

Japan is not only set to benefit from the build-out of AI but is also highly likely a beneficiary of the inevitable productivity gains that come from using it. Although we believe that in the past too much has been made of the supposed impending doom an ageing society would bring, it seems probable that labour productivity enhancements will be adopted more readily going forward as AI meets wage inflation. The demand BayCurrent, the IT consultant we wrote about last month, is seeing for AI implementation work at Japanese corporates may be an early sign that this process is already underway and the strong performance of the Company's shares in August may be a sign that the market is listening. BayCurrent was one of the top three contributors to performance, alongside two precious metal related companies: Furuya Metal, and ARE Holdings.

Tokio Marine was the largest negative contributor after a disappointing reaction to management holding full-year guidance flat despite a solid first quarter. The blow was softened somewhat later in the month by the announcement of a 15-for-1 stock split and a shareholder benefits programme.

Looking forward, we expect corporate Japan to remain on its path of consistent corporate governance improvement, productivity enhancement, and with a noticeably more ambitious growth mindset than we have observed for some time. In our view, investing in Japan can still offer significant balance sheet strength and genuine opportunities for operational efficiency improvements, which give us some comfort in a volatile market environment.