After years of disappointment, a quiet revolution may be under way in the Japanese stock market.
Japanese companies have for years sat on record piles of cash — the equivalent of US$2.4 trillion in September last year, the most in the world. The issue has been deploying those funds for shareholder benefit.
A key part of Abenomics has been sharpening the focus on return on equity, and now — through a mix of carrots and sticks — some investors see change on the horizon.
French fund giant Amundi Group, for one, is targeting cash-rich firms with sleepy management practices that are ripe for overhaul.
“I have been in this industry 25 years, but I have never seen this kind of approach before,” Yasunori Iwanaga, the Tokyo-based chief investment officer at the Japan unit of Amundi, which manages more than US$1 trillion globally, said in an interview this month. “Reactions we have seen over the last few years are increasing dividend payouts or buybacks. This trend should continue over time.”
Though it does not yet show up in the data — the number of companies in the TOPIX with dividend yields of at least 3 percent has fallen by half over the past year — Iwanaga is among those seeing fundamental shifts in the way that companies and their key shareholders are exchanging views and priorities.
Part of the reason is the Government Pension Investment Fund, the world’s biggest, has been tapped to push both asset managers and executives to address how cash should be deployed. ‘
The US$1.3 trillion fund last year said it would favor managers who actively engage. Japanese Prime Minister Shinzo Abe’s government also commissioned a stock gauge of companies that donot stockpile cash, which benefits from inflows from the fund and the central bank.
As a stick, ruling party officials have even floated the idea of a tax on retained earnings.
Still in the works are possible revisions to the nation’s stewardship code for asset managers as soon as this year, including better monitoring of asset managers.
The separate corporate governance code, introduced in 2015, had brought in requirements for placing independent directors on boards; it is now also undergoing debate for future revisions.
“Japan Inc has reached an historical turning point,” said Toru Ibayashi, head of wealth management research at UBS Group AG in Tokyo. “We view the new corporate governance code and stewardship code as game changers in the way Japanese companies are run.”
Until now, the main driver for Japanese shares has been the yen, with periods of weakness propelling equities thanks to higher corporate earnings, and vice versa. Not all have been enthused about the corporate-governance agenda.
A survey last year by the fund showed that some companies thought investors were wasting their time with pointless questions and meetings. Another survey went out this month, with results expected later this year.
Even so, 824 companies announced buyback programs last year, a 16 percent increase from the prior year, UBS data show.
The purchases were worth more than ¥6 trillion, UBS said.
Japanese tiremaker Bridgestone Corp became the showcase for the trend on Friday, when it unveiled its biggest buyback since at least 2000, with an operation the equivalent of US$1.3 billion.
The recipe should provide a jolt to a market distinguished by comparatively low dividends and return on equity. Stock prices of companies that have bought back their own shares since January 2012 have outperformed the benchmark index by more than 39 percent, the UBS data show.
“We are seeing a significantly positive change in the way corporate managers are engaging with shareholders,” said Hiroki Tsujimura, chief investment officer at Nikko Asset Management in Tokyo. “This trend will only accelerate from here on in.”
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