Japan’s stock market has spoken, and companies are very much listening.
January figures from the Tokyo Stock Exchange (TSE) suggest 40% of stocks listed on its Prime segment have made good on its request for corporate governance disclosures. That compares to just 20% back in July 2023, just a few months after the request was made, says Richard Aston (pictured), manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund
This is highly encouraging, suggesting the group of quality Japanese companies embracing shareholder-friendly reforms is expanding. With these firms offering the perfect opportunity to compound returns, Japan’s time to shine among income investors has arrived.
Encouraging transparency
To recap, the TSE’s disclosure request – published last March – focuses primarily on enhancing corporate value.
Specifically, the exchange is zoning in on listed companies with a Price to Book – or “PBR” – ratio of less than one. This indicates an inefficient approach to capital allocation, often to the detriment of shareholders.
Back in March, half of the names listed on Japan’s top-tier Prime index fell short of the acceptable PBR threshold compared to just 3% on the US S&P 500 at the time.
So, to foster a shareholder-first attitude and increase competitiveness, the TSE requested that stocks demonstrate management consciousness of cost of capital and market valuation by sharing the following steps:
There are no explicit repercussions for failing to meet the TSE’s request at this stage. So, it’s excellent that it is now being acknowledged by four in every ten Prime-listed stocks.
Even more encouraging, though, is the evidence these firms are serious about following up on their pledges rather than kicking the corporate value can down the road – as it were.
The clearest indicator in this respect is the ongoing growth in distributions to shareholders.
Nikkei Asia reports that dividends to be paid by Japanese companies are expected to hit their third consecutive annual record in the fiscal year ending March 2024. As of the time of its reporting, share buyback plans were also expanding at a pace approaching the previous period’s record highs.
More anecdotally, though, we’re also noticing an increase in the number of secondary offerings in the market.
Toyota, a highly influential Japanese company, is perhaps the best example – selling parts of its stake in Denso, KDDDI, and Harmonic Drive throughout 2023. With many others following suit, it feels indicative of a trend towards divesting strategic cross-shareholdings as a way of enhancing shareholder value and improving governance.
Likewise, we’ve observed a potentially significant increase in the number of management buyout (MBO) announcements in recent months. Most notable of all was that of Taisho Pharmaceutical, whose executives made an offer for private ownership valuing the business at almost $5 billion.
It suggests companies are increasingly questioning whether they need to be listed at all. If we see further scaling back of stocks who believe the benefits are outweighed by the additional costs and scrutiny, it could improve the capital efficiency of the market at large.
Income opportunities
All of this is setting in place strong momentum for rapid ongoing improvements in corporate governance across the Japanese market. In fact, we believe there is scope for the pace to increase further still.
After all, it seems likely that the TSE’s insistence that stocks demonstrate an awareness of corporate value will increase in severity over time. Not to the mention the fact that those who fail to comply risk looking comparatively unattractive to investors while also putting a target on their head for activist intervention.
In investor terms, it means more quality stocks striving to deliver more to their investors. For income investors, that’s an opportunity that cannot be overlooked in today’s volatile global markets.
By Richard Aston, manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund