Japan: Shareholders Are Benefitting from Corporate Reforms
Foreign investors are now the largest shareholder class in Japan and I think that is influencing the behaviour of Japanese companies. In Japan, like in other countries, most management teams tend to actually try and make their shareholders happy. As foreign investors have increased their presence, Japanese companies have been more and more willing to heed their requests and distribute excess cash to shareholders and that’s why we’ve seen a big sustained increase in dividends and also a big acceleration in share buybacks.
There are other factors that contribute to the trend. So for instance, the Japanese government now has a sense of urgency about the outlook for Japanese pension funds. In order for Japan to be able to afford the retirement of baby boomers, the Japanese government believes that Japanese equities must deliver higher returns and so GPIF, which is the government pension fund, along with other institutions, has been pushing companies into taking steps to improve returns.
Lastly, we’ve also had regulatory changes that have helped with this trend. So Japan has introduced a corporate governance code and a stewardship code modelled after the UK stewardship code. With these regulatory changes, companies and investors have to explain how they meet the needs to fulfil their fiduciary duties and meet the needs of their shareholders or their fund holders and I think that’s also driving higher returns for the market.
Japanese equities are a volatile asset class, a bit more so than Europe and the US. This is due to the makeup of the market. We have a high proportion of banks, industrial manufacturers, cyclical industries in general. As a result, Japanese equities are much more correlated to changes in the global macro economy than other regions and so, there is an element of risk that is certainly higher. However, over the medium term, I think that the structural bull case on Japan remains on track and that is that the quality of Japanese companies and the quality of their governance is trending towards European and American levels and because of that, I believe we can expect that Japanese equities will deliver above average returns over the medium term
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