The building momentum behind better corporate governance in Japan is reshaping what it means to invest in Japanese stocks. For decades, Japanese companies have run conservative, cash-heavy balance sheets and relied on conglomerate-style business models to insulate themselves from cyclical weakness in any one industry. Now, the government under Prime Minister Shinzo Abe has begun to exert pressure on company boards to increase the return on equity for shareholders.
Accordingly, many companies are looking to execute share buybacks, engage in corporate mergers, and find more growth-oriented methods for making their cash work to the benefit of shareholders. This has breathed new life into the balance sheets of many Japanese companies, and has enhanced the attractiveness of this market.
Another important shift in Japan concerns the changing behaviors of Japanese money managers. Led by the GPIF, Japan’s largest pension fund, professional investors are set to increase their holdings of Japanese stocks and lower their allocations to Japanese government bonds, which the Bank of Japan itself is purchasing in vast quantities as an economic stimulus measure. Against the backdrop of this technical sea change in favor of Japanese stocks, Japanese companies will have increasingly urgent incentives to focus on raising profitability.
In addition, Japanese stocks are as attractively valued now as they ever have been, and currently look cheaper relative to virtually every other developed market. This is especially remarkable, in our view, given the other positive trends at work for Japanese equities.