6/9/2025
Japan Finally Ignites Foreign Investor Interest After Decade-long Governance Push
Nikkei Asia (06/09/25) Nagumo, Jada
This June marks the tenth anniversary of Japan's adoption of the Corporate Governance Code, which set rules for shareholder rights, disclosures and more. The code was nonbinding but took direct aim at ineffective boards and encouraged listed companies to be more transparent. Although change has only come gradually, foreign investors are finally seeing signs of companies becoming more receptive to reevaluating their capital allocation strategies, especially following a series of policy initiatives, as well as pressure from the increasing presence of activist investors. Investment momentum is also gaining in Japan as demand for U.S. dollar assets wanes due to the Trump administration's aggressive, and at times confusing, tariff policies. Further, as confidence in the Chinese economy also wavers, investors are betting on corporate Japan to seize a golden opportunity. "The level of discussions and engagements with Japanese companies has gone up a hundredfold in the last 10 years," notes David Baran, co-founder of Singapore-based Symphony Financial Partners. Improved governance was a pillar of late Prime Minister Shinzo Abe's economic policies -- known as "Abenomics." When the code was adopted in 2015, some companies went in for box-ticking exercises rather than striving to increase corporate value. However, foreign investors are saying that things are speeding up thanks to the Tokyo Stock Exchange's recent push. In 2023, the TSE requested companies to be more conscious of their capital costs and stock prices, and asked for the disclosure of concrete action plans. "There was no big bang moment in which everything changed," said Alexander Treves, head of investment specialists for APAC equities at J.P. Morgan Asset Management. "Japanese culture can be quite incremental, but if we compare Japan now versus 10 years ago, not just in terms of sentiment but the magnitude of share buybacks, the unwinding of cross-shareholdings, the quantum of dividends being paid, things look much better now." In 2024, Japan Inc. engaged in record share buybacks, with over 1,000 companies pledging a total of 16.81 trillion yen ($108 billion) in repurchases. The amount of dividends paid in the previous fiscal year also jumped by 16% from a year earlier to 23 trillion yen, according to Nomura Securities. The Japanese brokerage forecasts another 10% rise in the current fiscal year ending March 2026. The decline of cross-shareholdings, a defense against foreign takeovers that emerged after measures to liberalize capital transactions in Japan during the 1960s, has also been eye-catching. A report by J.P. Morgan highlighted that divestment in cross-shareholdings is accelerating in Japan, with over 7 trillion yen recorded in the fiscal year ending March 2024. Major nonlife insurers have vowed to sell their entire cross-shareholdings, and Toyota Motor will further slash its strategically held shares now that key parts supplier Toyota Industries has accepted a takeover bid. Moves to offload noncore business assets are also taking place, primarily in real estate. The pressure is on, not just from policymakers but also investors, including so-called activist funds. Shareholder activism has boomed in Japan, with 108 campaigns launched in 2024, up 74% compared to 2018, according to Diligent Market Intelligence. The phenomenon is not unique to Japan. Shareholder activism is also picking up across Asia, particularly in South Korea and Taiwan as these economies push ahead with government-backed corporate governance reforms. Elliott Investment Management, one of the world's largest activist funds, has recognized the rate of change in Japan's governance transformation. According to sources familiar with the matter, the U.S. hedge fund is expanding its Japan investment team and is ramping up activities in the country with plans to deploy more capital. Investors and experts believe there is scope for further improvement. Tsuyoshi Maruki, founder and CEO of Japan-based Strategic Capital, said change has mostly been visible at larger companies with a higher ratio of foreign investors and that smaller companies still have a long way to go in terms of governance transformation. The ex-executive of the now-defunct Murakami Fund went further. "There are still a lot of management, as well as outside directors, who do not fully understand what capital cost is," he said. "The TSE and Financial Services Agency have worked hard, but companies are not keeping up." Capital cost measures what companies pay to finance their operations and investments, and can help investors -- who wish for companies to maximize shareholder value -- calculate an expected return on investment. Corporate Japan "has not met international best practice yet in areas such as board diversity and having a majority independent board," said Jen Sisson, CEO of the International Corporate Governance Network. While it is the norm in the U.S. and U.K., only 25% of Japanese companies listed on the TSE's Prime section have a majority independent board, data from Daiwa Institute of Research shows. Added Sisson: "I would strongly encourage Japanese authorities to continue pushing companies to publish their securities report before their annual general meetings. Japan is extremely unusual in having these documents published after the AGM. Sharing the materials with shareholders before will be a massive step forward." In response to criticism and foreign investor demand, Finance Minister Katsunobu Kato in March asked all listed companies to disclose information before their AGMs. Symphony Financial Partners thinks Japanese companies can do more with the cash they are sitting on. Co-founder Kazuhiko Shibata said companies can use their capital for mergers and acquisitions to seek higher returns. "It's not just buybacks and dividends. There are more opportunities and ways to use the cash that is piling [up] in their accounts, and more investors should recognize that too," he said. Japanese companies continue to accumulate cash on their balance sheets. Despite strong profit growth over the past decade, return on equity has remained stagnant, with many companies below 10%. In the U.S., more than 30% of companies churn out ROEs of above 20%. "Japan has become more interesting in our view based on attractive valuations, governance improvements and the positive change in business strategy that we have seen across multiple sectors," said James Smith, founder and chief investment officer of London-based Palliser Capital. "It feels to us like many companies have moved from a reluctant acceptance that they ought to change to a constructive acceptance of the need to change." Smith added that a shift among local Japanese asset managers has been a refreshing development in that more are willing to support change and agree to shareholder proposals. In the past decade, Japan's benchmark Nikkei Stock Index has nearly doubled. Last year it rose to an all-time high of 42,224.02. Meanwhile, the index's average price-to-book ratio, which measures the market capitalization of a company relative to its book value, is around 1.4. The S&P 500 has a P/B ratio of around 5. "Japan's economic power is weakening relative to the rest of the world," warned Strategic Capital's Maruki. "Companies need to improve capital efficiency and help revitalize the economy." Backed by their cross-shareholdings, Japanese companies were able to protect themselves from hostile takeovers and strengthen relationships with business partners. However, Japan's lack of innovation and waning competitiveness have led to the need for companies to streamline their operations. Companies in Japan -- as well as those in South Korea and Taiwan -- that are making this shift offer investors who have won big on Western bourses a chance to repeat their success. "The genie is out of the bottle," J.P. Morgan Asset Management's Treves said. "Not enough foreign investors have caught on to Japan's changes, but we think they will soon."
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