Japanese stocks double down on dividends in bumper results season

The latest results season shows the trend to increase shareholder value and shareholder returns is still on track in Japan, explains Richard Aston, manager of the Chikara Japan Income & Growth Fund and the CC Japan Income & Growth Trust plc.

There were a lot of eyes on Japan during the recent FY23 results season.

Exporters led the Nikkei to multi-decade highs during the period. So, with the yen weakening even further of late, the question for investors was clear – how much higher can the market go?

This blend of sky-high expectations with Japanese conservatism was always going to be jarring. And the net result has been some profit-taking in the face of more-cautious-than-expected FY24 earnings forecasts.

But such a short-term approach overlooks the real investment opportunity in Japan.

The FY23 results season once again showed corporations demonstrate a continuing commitment to increasing the value they deliver to shareholders. This is what will ultimately lead the nation to deliver outsized returns over the long-term.

Looking through the noise

The root cause of earnings forecast disappointment in Japan appears in many cases to the be the use of conservative currency rates.

Take Toyota, for example.

The automaker, which is also a large Japanese exporter, forecast a 20% decline in its operating income in FY24 – driven in part by plans for large-scale investment. But to come up with this figure, the company used a full-year foreign exchange rate assumption of 145 yen per US dollar.

The Japanese currency hasn’t been this strong since the beginning of the year. In fact, as at the time of writing, the exchange rate is 156 yen per US dollar – a level sparking rumours of central bank intervention.

Perhaps the yen will strengthen to such a degree. Perhaps Toyota and others are forecasting figures they know they are likely to beat.

But we feel this sort of speculation – along with the trading resulting from it – really amounts to short-term noise.

The far more important, and promising, story for investors is corporate Japan’s growing dedication to delivering more value to shareholders. And this very much remains in play.

Increasing shareholder value

The drive to improve the treatment of Japan’s shareholders began in earnest under former PM Shinzo Abe in the 2010s with the introduction of stewardship and governance codes.

It has gathered even more momentum recently through a major reform of the Tokyo Stock Exchange and current PM Fumio Kishida’s drive to get more Japanese citizens investing with his “Asset Income Doubling Plan”.

During this period, dividends have hit record highs,  share buyback programmes have expanded,  and cross-shareholdings continue to be unwound.

Encouragingly, Japan’s latest results season demonstrates a continuation of this momentum.

Dividends are on track to total a record 22 trillion yen in the current fiscal year, up from 20 trillion in FY23 (itself an 10% increase on FY22).

We saw this trend in action across our own portfolio. Nippon Gas, Japanese Securities Finance, Tokio Marine Holdings, and Mitsubishi Corporation all increased their FY23 dividends and announced planned FY24 hikes in excess of expectations.

Nomura Securities, meanwhile, forecasts share buybacks will reach 11.1 trillion yen in current fiscal year ending March 2025 after dipping 3.3% in FY23 as stocks began to look less undervalued due to the Nikkei’s rise.

In the first month of the current fiscal year alone, firms announced a record 1.2 trillion yen of buybacks according to Goldman Sachs.

Entry opportunity

The latest results season without a doubt provides a large vote of confidence in Japan’s long-term dedication to delivering greater value to shareholders.

Moreover, with pressure from the Tokyo Stock Exchange growing – in particular to increase price-to-book ratios to greater than one – we see the momentum growing from here. The fact total payout ratios in Japan remain low by international comparison only serves to emphasise the long-term upside on offer here.

Viewed in this light, then, the current weakness in Japan’s currency serves as an excellent entry point. We believe that there are currently increasingly attractive opportunities in mid and small cap companies, which will benefit when the Yen strengthens and draws the spotlight away from the large cap exporters.