About 65% of investors found Abe’s ‘three arrows’ structural reform programme the most compelling reason for investing in Japan, followed by undervalued stocks (40%), shareholder return potential (30%), improvements in efficiency (20%) and monetary and fiscal stimuli (20%).
The introduction of corporate governance and stewardship codes are, in particular, the key drivers to spur change in corporate governance practices and drive higher shareholder returns, the survey report said.
Although investors seem optimstic about Abenomics, the biggest investment risk was policy ineffectiveness in revitalising the Japanese economy, which was cited by 40% of respondents. It was followed by resistance to corporate governance change (35%), demographics (35%), global macroeconomic weakness (25%), foreign investment outflow (25%) and a strengthening yen (20%).
In another key finding, 60% of respondents said the negative interest rate environment did not affect their investment stance towards Japan, despite concerns over its effectiveness in bolstering the economy.
The survey involved investors from 19 large and small investment firms in North America and Europe with aggregated equity assets under management of $679bn, of which $49bn is invested in Japanese equities.
Cultural change
Corporate culture and governance have been key issues that impact on Japan investment, and corporations have been gradually moving to favorable dividend payouts and other measures that are shareholder-friendly.
“Japanese issuers can better position themselves to international investors by prioritising capital efficiency and returns. The pace of change will also be important for international investors to justify their continued allocation to Japan,” said Michael O’Brien, vice president of environmental, social and governance advisory and depositary receipts at BNY Mellon.
Investors cited a potential box-ticking mentality (45%) and corporate culture (45%) as the biggest challenges to the adoption of corporate governance and stewardship codes.
“Environmental, social and governance investing has grown significantly over the last few years as investors integrate ESG factors into their investment processes. It is encouraging to see good corporate governance being discussed more regularly in Japan since the introduction of the codes,” Neil Atkinson, Asia-Pacific head of depositary receipts said.
