The combination of a cheap yen, geostrategic realities and a newfound can-do attitude among domestic leaders has put Japan back in play as a global contender. Leaders in finance, industry and innovation around the world are now pressed by their boards to develop concrete investment strategies. Japan is back as a leading contender as de-dollarisation and re-assessment of geoeconomics accelerates.

There are some key forces that will work to create sustainable Japan opportunities over the next decades, for both global and domestic companies. Here are four megatrends poised to shape the next phase of Japan’s economic and social evolution.

1. Demographics forces industrial consolidation

Japan has about 3.6m companies, 2.5m of which are owned and run by founders who will be over 70 years old next year. Of these, 1.6m do not have a successor, a son or daughter interested in taking over.

This demographic reality has unleashed a growing tsunami of mergers and acquisitions. Businesses that were never for sale are now up for grabs. The chances of partnering with or buying a Japanese company have never been better. The M&A wave will get bigger. Roll-ups and industrial consolidation will create unprecedented opportunities for global players to raise their market share and profit from increased economies of scale.

2. Freeing up household wealth

Japanese households have accumulated some $30tn of wealth. About $20tn of this is in financial assets, with about half stashed away as tansu yokin, the famous mattress money.

Again, demographics is key to unlocking real structural change. About $12tn of these household financial assets are owned by people aged over 70. This means $5tn or $6tn – or 1.3 to 1.5 times Japan’s current gross domestic product – will become unfrozen over the next decade. Even after inheritance tax, this implies a significant boost to the purchasing power of Japan’s younger generation.

Make no mistake: the legacy of the legendarily high savings rate of Japan’s baby boomers will significantly boost next-generation purchasing power. Most economic forecasts completely ignore this wealth transfer effect, thus underestimating the potential growth in domestic demand.

3. From seniority-based to merit-based pay

The war for talent is intensifying and will only get worse. Japan’s young generation feels its power, and the tables have turned. Graduates are no longer begging for jobs. Companies are begging increasingly scarce graduates to join and retention of employees is becoming tough. According to several studies, as many as one in five University of Tokyo graduates now quit their initial employer within the first five years.

Importantly, employees don’t just want higher pay. They also seek greater responsibility and impact. If you joined a top Keidanren company in the 1960s, it took on average 13 years for you to become the general manager. Today it takes 24 years.

Companies that inspire and empower their employees will pull away from those that insist on the old ways. Labour mobility will surge, and companies that offer genuine and transparent career planning and merit-based compensation are poised to move ahead. Here, global companies still have a lead, but as local Japanese companies adapt, the war for talent – and thus the need for increasingly creative leadership – will intensify. The net result? Productivity will surge, and so will employee incomes – yet another reason why standard economic forecasts are too pessimistic on domestic demand.

4. Open-door Japan

Japan will become an immigration powerhouse. Before the pandemic, the country was on track to accept about 150,000 new non-Japanese employees per year. This more than doubled to almost 350,000 in the first half of 2023. There are now approximately 3.2m non-Japanese residents, up from barely half a million 30 years ago. Visa and permanent-residency requirements continue to ease.

Most importantly, the biggest obstacle to employing non-Japanese talent – seniority-based rather than merit-based compensation – is beginning to change. All said, it is now perfectly reasonable to expect that about 10% of employees will be non-Japanese by 2030. That’s more than double the current rate of just below 4%.

Common theme

Underlying these four Japan megatrends is demographics. Far from being a negative – fewer people must equal lower consumption – Japan’s demographics will turn out to be a catalyst for positive change.

Industries will consolidate this, allowing greater efficiencies and economies of scale. The mattress money wealth of Japanese households will free-up and re-enter economic circulation. Increasingly scarce labour will be empowered and gain purchasing power, and global talent will build careers and make their fortunes in Japan.

Importantly all these forces are long-term structural ones, in place well beyond business cycles or political mood swings.

The biggest counter risk is inflation. The latest upper house elections showed how angry Japanese voters are at the loss of purchasing power, with inflation being the number one issue. Particularly hard hit are pensioners, who have seen their purchasing power cut by almost 30% in the past two years, being disproportionately impacted by surging food and energy prices. Here, the Bank of Japan stands accused of not delivering on its mandate to guarantee price stability: the consumer price index has been running well ahead of the 2% inflation target for 39 consecutive months, with the latest print at 3.4%. Japan stands out as the only advanced economy with significantly negative real rates.

Still, while monetary policy has its challenges the underlying Japan megatrends are a clear tailwind for Japan investment opportunities. Predictable, reliable, full of opportunity – Japan is poised to become a major beneficiary of de-dollarisation.