If it is sustained, then it stands to provide a major long-term tailwind for the balance sheets of Japanese equities and overall stock market performance. Not to mention that rising prices could provide Japanese citizens with yet another incentive to move their savings into assets like equities that can generate higher returns.
The driver that could have the most positive long-term influence on domestic sentiment towards Japanese equities, however, is corporate governance reform.
After all, this is a structural trend effectively looking to enforce a permanent increase in the value Japanese stocks deliver to their shareholders.
The drive began with the introduction of 'Abenomics' in 2012. This resulted in the creation of the corporate governance and stewardship codes that have consistently supported improvements in areas like dividends and share buybacks for years.
Last year, the reforms became truly encompassing when the Tokyo Stock Exchange launched its root-to-branch reorganisation of Japan’s stock markets.
In particular, March 2023 saw the TSE publish a disclosure request focused primarily on enhancing corporate value.
It has been very successful so far. In January, figures suggested 40 per cent of stocks listed on the TSE’s Prime segment had made good on the TSE’s request for corporate governance disclosures. That was up from 20 per cent in July 2023.
Meanwhile, dividends and share buybacks have also soared, management buyouts have hit new record highs, and high-profile names like Toyota are leading the drive to unwind cross-shareholdings.
All this suggests Japanese companies are really following through on their corporate governance pledges. Now the stage is set, we expect the scale and intensity of reform to accelerate.
For example, we are already seeing the grassroots of change in Japan’s highly conservative pensions industry. The Government Pension Investment Fund is looking to improve corporate value by increasing its active allocation in stocks and tapping more fund managers for that purpose.
Likewise, Japan’s Financial Services Agency recently threw its hat into the corporate governance ring when it urged four leading casualty insurers to accelerate the divestment of their cross-shareholding in the face of industry-wide price-fixing scandals.
Redirecting investment flows
The development of a 'shareholder first' attitude among Japanese corporations and the prospect of sustained inflation are already attracting record buying among foreign investors.
In January, for example, foreign purchases of Japanese stocks hit their seventh-highest-ever monthly amount.
International asset allocators have been buoyed in particular by the weakness of the yen over the past year. This has worked to make attractive valuations in quality stocks even more of a bargain. And this, in turn, has been a major driver behind the extraordinary rally of the Nikkei, which surpassed its all-time high in February.
