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By Jeremy Glaser | 04-26-2010 02:35 PM

Japan Is Waking Up to the Chinese Market

Matthews Asia's Jesper Madsen thinks Japanese firms that look to China for growth will be able to overcome domestic macroeconomic overhangs.

Jeremy Glaser: You said about a quarter of your portfolio is in Japanese dividend paying stocks, but the yields of Japan are actually a little bit lower than it is in the rest of Asia. Why is that such a big concentration of yours with that lower yield there?

Jesper Madsen: I've been getting a lot of those kinds of questions, because, again, the obvious thing both from a macro perspective and from a yield perspective would be to exclude Japan. But as it happens, as bottom up investors, Japan is a large economy. You still have some of the best companies in the world at what they do. To give you some examples, if you are a Japanese company, you may not realize that your future growth may not only reside with what takes place in the US and in Europe, you've probably woken up to the fact that you have China right next door. So you start seeing cosmetics companies aggressively build a retail presence in China.

You have, again, baby products. If you have, as a Chinese household, some concerns about what goes into the manufacturing processes if you buy a Chinese made baby bottle, for instance, you may have some concerns. Is this safe? We had a milk scare in China a little while back.

These kinds of health concerns actually enabled this company to go and sell their products, a Japanese company sell their products, at a very substantial premium to locally manufactured goods.

That just shows you a couple things: that people are willing to pay for brand now in China, and they are willing to pay for quality. The ability to do so is there. These companies are seeing China is the fastest growing portion of their business.

Automation is another one, robotics. As you know, China overtook the US as the largest car market in the world last year. You're not going to assemble cars by hand. You're going to increasingly automate that to increase efficiency, productivity, but also to streamline quality control.

Again, that's where you have some of the Japanese companies that are the best in the world at helping build out the automation, basically the backbone of the manufacturing that takes place in China as well.

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