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Rising activism in Japanese equity market could help drive returns

The market for Japanese equities has been one of the best performers in the world this year. While many investors are likely to remain wary, given repeated false dawns over the past few decades, there are good reasons to believe the rally can continue. These include greater shareholder activism, which could force companies to take measures that’ll boost price-to-book ratios.

Tokyo skyline with Mount Fuji background Source: Getty Images

Japanese equities outperform

Japanese equities are on a roll, with the Nikkei 225 index doubling in value between March 2020 and June 2023. By contrast, US stocks rose by around 28% over the same period.1,2 In June, Japanese stocks regained highs not seen since the early 1980s, when the country entered its decades-long deflationary era.

The rebound reflects optimism that inflation is becoming entrenched, as well as the impact of the reform drive initiated by the late premier Shinzo Abe, which included measures to improve corporate governance.

A new force that could continue to drive stocks higher is now emerging in the shape of activist investors, including hedge funds. Emboldened by a Tokyo Stock Exchange (TSE) initiative, more than 340 shareholder resolutions were submitted to about 90 listed companies for voting at annual shareholders meetings in June. That’s the month when a majority of Japanese firms hold these meetings. The proposals included higher shareholder returns and the sale of non-core assets.3

Japanese stocks have outperformed other global markets this year

Japanese stocks have outperformed other global markets in 2023 Source: MSCI
Japanese stocks have outperformed other global markets in 2023 Source: MSCI

In the past, Japanese companies have generally ignored demands from shareholders seeking greater returns and more efficient allocation of capital. According to Nikkei Asia, the potential for Japanese companies to become more receptive to these calls, along with the weakness of the yen, has given global investors like Warren Buffett more reason to bet on Japanese stocks.

The TSE has taken a leading role in pressing companies to respond to shareholder concerns. On 31 March, it sent a letter to 3300 companies – including the likes of Toyota Motor, Mitsubishi UFJ Financial Group, and SoftBank Group – calling for a stronger focus on share price and capital efficiency. The exchange ‘demanded’ a ‘concrete action plan’, according to Nikkei Asia. The TSE hopes these measures will boost foreign interest in Japanese stocks.4

Plenty of potential to increase price-to-book ratios

Over 40% of Japanese blue chips have price-to-book (P/B) ratios of below 1, which means that the company’s stock-market capitalisation is less than its book value. By contrast, the figures for Europe and the US are around 20% and just under 10%, respectively. 6 If a company’s P/B ratio is below 1, the market is valuing the company at less than its assets are worth, so investors have little incentive to buy the stock. On the other hand, if companies can convince investors that there’s potential to increase their value, those same shares can seem like bargains.

There are a number of ways in which Japanese businesses can improve their P/B ratios, according to Schroders. The asset manager says the request to companies from the TSE, for example, specifically mentioned steps like ‘pushing forward initiatives such as investment in R&D (research & development) and human capital that leads to the creation of intellectual property and intangible assets that contribute to sustainable growth, investment in equipment and facilities, and business portfolio restructuring’.

Schroders 7 adds that another method is to increase returns to shareholders, either via dividends or through buybacks (whereby the company repurchases its own shares).

Finally, Schroders says the ‘good news’ is that Japanese companies are well placed to take some or all of these steps. It concludes that ‘the percentage of companies that are “net cash” (ie whose cash on the balance sheet is greater than their liabilities) is 50%. That gives those companies scope to invest in their business, or increase returns to shareholders, or perhaps both’.

1 https://www.google.com
2 https://www.google.com
3 https://www.reuters.com/sustainability/boards-policy-regulation/nearly-70-japan-firms-expect-more-activist-proposals-2023-06-21/
4 https://asia.nikkei.com/Spotlight/Market-Spotlight/Japanese-companies-embrace-shareholder-activism-as-never-before
5 https://asia.nikkei.com/Business/Markets/Tokyo-bourse-tells-Toyota-SoftBank-others-to-lift-capital-efficiency
6 https://asia.nikkei.com/Business/Markets/Tokyo-bourse-tells-Toyota-SoftBank-others-to-lift-capital-efficiency
7 https://www.schroders.com/en/global/individual/insights/japanese-shares-have-hit-33-year-highs-but-why-/

Publication date: 2023-10-20T11:52:00+0100

The information in this presentation does not contain (and should not be construed as containing) personal financial or investment advice or other recommendation, or an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of the above information. Consequently, any person acting on it does so entirely at his or her own risk. The information does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. IG Australia Pty Ltd ABN 93 096 585 410, AFSL 515106.

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