Structural changes in Japan: Corporate governance
In this two-part blog, we put the spotlight on the structural changes in Japan that are coming to the fore and having real impact. We highlight the need-to-know aspects of the instrumental political, regulatory and investor-led reform taking place and explain how these are carving out multiple opportunities for investors within this space.
Today we outline the shift and improvements we have seen in Japanese corporate governance over recent years.
Japan is changing — for real this time
For the last 20 years there has been lots of talk about the supposed ‘changes’ happening in Japan. But many investors have been badly bruised. Some stalwart critics have even gone as far to claim that Japan will never change. However, we believe that the emerging developments coming out of Japan are positively affecting the fundamentals. In our view, the outlook for investors is optimistic – for real this time.
Japan’s corporate governance 101: Three key developments
Below we discuss the top three developments that we believe have been critical to securing corporate governance reform in Japan.
1. Abe's policies
Japan’s Prime Minister Shinzo Abe, elected in 2012, has been on a mission to resolve his country’s macroeconomic problems. A three-pronged approach (pillars), his policies – more commonly known as ‘Abenomics’ – aim to deliver:
1. Monetary policy
2. Fiscal policy
3. Structural reforms
His third pillar has homed in on tackling some of Japan’s long-standing concerns within corporate governance – a first in Japanese government history. His administration has actively encouraged corporates to diversify management, increase spending/investment and to unwind their cross-shareholdings i.e. Japanese companies holding shares in other Japanese companies, as a part of their business relationship.
2. ‘Corporate Japan’: Stewardship and Governance Codes
3. Market dynamics: Foreign investment, global standards and vocal shareholders
Proof that fundamental and attractive change is occurring in Japan can be evidenced by the fact that the number of foreign investors in Japan has significantly grown over recent years.1 After years of stark contrasts between Japanese companies and their global counterparts, foreign investors have now fostered a new and bold culture of speaking up and calling out. Companies are being forced to adhere to global standards by their foreign shareholders and this is bringing about credible change. The same trend has been seen in domestic investors. From small shareholders to large public pension firms, more and more domestic Japanese shareholders are also becoming vocal, unlike ever before. As such, poor practices in local-only Japanese companies are now firmly being challenged to improve their governance process.
Abe’s vision for the new ‘Corporate Japan’ has also encouraged the government’s Financial Services Agency (FSA) and regulatory bodies to toughen up. Since then, the Japan Stewardship Code and Corporate Governance Code have come into play and are now seen as powerful positive forces in reshaping corporate behaviour. As a result of these codes it has become very difficult for companies to maintain their sloppy governance practices.
Why does all this matter to investors?
Japan’s equity market history has been volatile and noisy. It is understandable that many investors have been hesitant in their view of Japan or have been considering taking underweight positions. However, we firmly believe that the aggregate result of all of these changes boils down to one thing: the opportunity set and outlook for Japan is now very attractive for those who are already invested or considering investing.
We believe the change in Japan is real, and here to stay.
Stay tuned for part two where we take a deeper looking at Japan's changing demographics.
1 Source: Japan Exchange Group, “2017 Share ownership Survey” (p.3, Chart 2). Just over 30% of the market owned by foreigners indicated by dark blue line in 2017 and roughly 18% in 2000. https://www.jpx.co.jp/english/markets/statistics-equities/examination/b5b4pj0000026yq9-att/e-bunpu2017.pdf