Hedge funds are shifting Asian investments out of Japan because of lower returns and poor corporate governance in the region's biggest economy, said Kathy Matsui, Goldman Sachs Group Inc chief strategist in Tokyo.
Japan's average return on equity will be about 10.2 percent this fiscal year, compared with 20 percent in the US and 15.7 percent in Asia, according to Matsui. Return on equity is a measure of how well a company uses its cash to generate profit.
Meanwhile, Japanese companies are fending off purchases by foreign firms seeking to boost share prices, by buying stakes in each other or taking so-called poison pill measures. Some 400 Japanese companies, or 10 percent of all publicly traded firms, have taken steps to ward off hostile takeovers, according to a Nikkei newspaper survey published last month.
"I meet foreigners all the time; there has been disappointment with the Japanese market," Matsui said in a telephone interview. "So Japan has been the favorite short, and that's been the price action."
Hedge funds investing in Japan have seen outflows of about US$7 billion, while Asia ex-Japan has seen inflows of about US$17 billion through last month, according to data provided by Eurekahedge, a Singapore-based hedge-fund research company.
The Nikkei 225 Stock Average is down 4.3 percent this year in dollar terms and may be headed for its worst year since 2002. The Eurekahedge Asia Ex-Japan Hedge Funds Index has returned 35 percent this year, compared with a 1.9 percent advance in the Eurekahedge index that tracks hedge funds that invest in Japan.
The majority of about 700 international investors attending a Goldman Sachs two-day conference in Tokyo earlier this month were interested in investments in Asia, according to three attendants including Hiromichi Tsuyukubo at Myojo Asset Management Japan Co.
"Interest in Japan was on average lower than last year," said Tsuyukubo, who helps manage about US$800 million at Myojo Asset, a Tokyo-based hedge fund. "But the good thing was that the conference attracted a lot of long-term investors such as college foundations and family offices."
Investors in Japan including Warren Lichtenstein's Steel Partners and Harbinger Capital Partners have had hostile takeovers rebuffed as Japanese companies resort to poison-pill defenses and cross-shareholdings.
Bull-Dog Sauce Co, a condiments maker, in June rejected a takeover approach from Steel Partners and allowed all investors except the fund to convert warrants it issued into common shares. The Tokyo High Court termed Steel Partners an "abusive acquirer" in striking down the fund's legal challenge to the move. Japan's Supreme Court later sided with Bull-Dog.