Japanese companies relish China’s one-child policy reform

When China's one-child policy reforms were announced, shares in Japan’s baby-related industries immediately surged on expectations that demand would spike.

A customer browses baby clothes at a store in the Ginza district of Tokyo. Kiyoshi Ota / Bloomberg News

Skyscrapers, sushi, sumo – and pensioners. Japan is a nation that is fast becoming synonymous with its ageing population.

Japanese businesses have adapted accordingly, with a number of so-called “silver industries” tapping into its mature population, leaving baby-related industries facing a bleaker future.

Recently, however, Japan’s baby sector underwent an unexpected upturn: shares suddenly spiked and the industry was injected with a new-found sense of optimism. The reason? China.

Japan’s neighbour and key trading partner, with its huge population, has long been a magnet for baby and children-related industries from overseas.

This month, however, Sino-Japanese business ties are set to deepen further – as China relaxes a decades-old authoritarian policy limiting families to only one child, enabling some to have two children.

The relaxation of its one-child policy marks a bold turnaround compared to 1979, the year the laws were first introduced to controversial effect: human rights campaigners claim it has prevented 400 million births and led to a rise in selective abortions and infanticide among parents who preferred male over female babies.

Analysts predict that the relaxation of the one-child policy, which forms part of Beijing’s boldest set of reforms in decades, will result in one million additional children born every year – triggering an unprecedented baby boom in a country that already holds the number one spot as the world’s most populated nation.

And this, it seems, is where Japan is more than eager to step in.

When the reforms were announced, shares in Japan’s baby-related industries – from disposable nappies and musical instruments to toy manufacturers and educational products – immediately surged on expectations that demand would spike.

Among them was Japan’s Unicharm, the disposable nappy maker, whose shares shot up 4.2 per cent on the first trading day after the announcement and went on to gain 44 per cent last year.

It’s a timely boost for baby-related industries in Japan, a nation whose status as one of the world’s fastest ageing countries was recently confirmed in the forecast that adult nappies would outsell baby versions as early as 2020.

A growing number of industries in Japan have similarly started repositioning themselves as a result, shifting their focus from the young to the elderly as they adapt to the nation’s demographic ageing.

But news of China’s forecast baby boom has no doubt resulted in an injection of optimism in Japan’s long-suffering infant-related industries – and a flurry of activity to tap into rising opportunities across the East China Sea.

Analysts at Nomura Holdings, the Japanese financial company, forecast that the policy would most likely have an impact from next year, with an expectation for “competition to heat up in the baby-related sectors” as a result.

Emma Liu, an analyst at Nomura, said in a report: “The loosening of the one-child policy … is positive for the baby-related and dairy stocks although the earnings impact is unlikely to kick in until 2015 and the materiality is still uncertain.

“However, as most of these stocks have seen a strong rally and their valuations have become stretched, in our view, we expect some investors will book profit on these names in the short term.”

Among the companies in Japan destined to benefit from the relaxation of the one-child policy is Yamaha, renowned for the production of high-quality musical instruments and music schools, which has long looked to tap into its highly populated neighbour.

China is already the fourth largest – and fastest growing – market for Yamaha, as well as the location for more than half of its piano sales distributed via 1,700 stores and 39 music schools.

Expressing cautious optimism at the one-child policy relaxation, Kenji Arakawa, a spokesman at Yamaha, told The National: "Since the one-child policy has been in effect for over 30 years, we believe the relaxation would not immediately affect the population of toddlers in China.

“The expenses of bringing up children will continuously account for a huge portion of consumers’ income, and there are quite a lot of parents in the urban areas who would like to avoid pressures and competitions involved in raising children. Therefore, we think the relaxation will increase market size and population in the long term, but we believe the impact will be minimal for the time being.

“We will continue to regard China as one of our important markets of sales and production.”

Japan’s toy industry is another key sector likely to be hopeful that the new policy in China will result in a surge in business – particularly in the context of its dwindling domestic market, according to a recent report by Euromonitor International, the London-based market intelligence firm.

Focusing on Japan’s two biggest toy manufacturers Takara Tomy and Bandai Namco, the report read: “With Japan forecast to have less than 0 per cent compound annual growth rate in toys and games from 2012 to 2017, these leading toy companies need to look elsewhere if they hope to capitalise on the significant growth expected to come from this region,” it said.

“China is set to become the most dynamic market in the region over the forecast period and is also where both toy companies have limited exposure.”

Hand in hand with a rise in potential opportunities for Japanese toy manufacturers, however, is an increase in competition – the new policy will pave the way for a surge in Chinese toy products as well as those from overseas, according to Joy Huang, a research manager at Euromonitor.

Referring to the outlook for Tomy in particular, she said: “The relaxation of the one-child policy will have a positive impact on China toys industry, but it will be a general impact on the overall toys market, not specifically to Tomy.

“One possible specific impact to Tomy might be that if more families in first and second tier cities are having the second child, it will generate higher demand for mid-to-high-end toys, where Tomy’s positioning fits in.”

There is little doubt, however, that the benefits for any Japanese business in China keen to tap into the relaxation of the one-child policy is a long-term prospect, according to Makoto Kikuchi, the chief executive of Myojo Asset Management in Tokyo.

“There could be a big impact on Japanese businesses,” he said. “In particular, I think the demand for educational products could increase.

“The growth potential for this area is pretty big. Companies such as Benesse House and Justsystem could tap into a larger number of children in China.

“But this is very much a long-term impact – perhaps five to 10 years. I think that this policy relaxation could have big potential for Japanese businesses, but it depends on how they react and implement and capture this opportunity.”