The improvements witnessed so far in Japan are just the start of a long-term upward trend in corporate reform in the nation.
This is according to Man GLG portfolio manager Emily Badger, who believes that corporate Japan is “undergoing the most radical reform in a generation”.
After the Tokyo Stock Exchange (TSE) announced an improvement order to require any company trading below a price-to-book value of 1x to enhance their capital efficiency, a flurry of buyback announcements followed.
The TSE also announced rules to require non-compliant companies to disclose action plans.
But these changes are just the start of Japan’s journey, Badger said, as business restructuring and disposal of surplus assets often take time before a radical enhancement of capital efficiency can be seen.
“This will therefore likely continue to be a long-term story,” she said. “Given the scale of improvement required by value stocks, this should continue to benefit the value style.”
Indeed, over the past year, value stocks have outperformed growth stocks in Japan by over 11% as the lower-priced stocks benefitted more from the reforms.
Major announcements
Towards the end of 2023, Toyota Motor, the Japanese-listed largest automobile manufacturer in the world, announced its plans to reduce major cross shareholdings, which includes its stakes in Denso and KDDI worth $4.7bn and $1.8bn respectively.
In the past, many Japanese companies took stakes in their group affiliates or business partners which had negative side-effects such as limiting the influence of outside shareholders or tying up scarce capital that could be reallocated elsewhere.
“Companies have been slowly unwinding these holdings for years but the recent requests from the TSE have accelerated the movement,” Badger said.
“Such announcements by large, influential companies should also be positive for the whole of corporate Japan and should make conversations around cross shareholding reductions much easier,” she added.
As of mid-July 2023, 31% of Prime-listed companies disclosed initiatives to improve their corporate value to the TSE, according to the Japan Exchange Group.
The impact on larger companies has been more significant. 45% of companies with a market cap larger than Y100bn ($709m) and a price-to-book ratio of 1x have disclosed.
“The TSE is determined to keep the momentum going and improve corporate governance and value even for companies with a price-to-book above 1x,” Badger said.
“The latest TSE initiative includes naming and highlighting companies that have already disclosed their improvement plans in addition to a request for companies to explain the significance of having listed subsidiaries and detail their efforts to ensure subsidiary independence.”
“This is not a box ticking exercise,” she added. “Rather, the TSE is pushing for genuine change and will require a clear explanation if any corporation is not joining in.”
Don’t ignore retail
If the measures continue to gain traction and the Japanese equity market powers ahead, close attention should be paid to Japanese retail investor as another catalyst for the market, Badger said.
According to the Bank of Japan, Japanese households currently hold 53% of their wealth in cash and 12.7% in equities. This compares with the US where consumers hold 14% of their assets in cash and 39% in equities.
If structural deflation has truly come to end in Japan, households will be incentivised to move cash into the market to prevent eroding pricing power, Badger explained.
The Japanese government has unveiled an overhaul of the existing Nippon Investment Savings Account (NISA), hoping to turn Japan’s savers into investors to reform the asset management industry.
Badger said: “Prime Minister Kishida has made NISA the pillar of his vision for a ‘new form of capitalism,’ which emphasises concepts such as better wealth distribution and a virtuous cycle of growth.”
“The scale of this potential catalyst should not be ignored,” she added.
