“Things are getting testier at Japan Inc,” says Jeffrey Goldfarb on Breakingviews. Trading house Itochu has been waging a hostile takeover war against sportswear maker Descente, and IT conglomerate Toshiba is grappling with a shareholder insurrection.
This highly unusual “domestic corporate aggression” highlights the progress Prime Minister Shinzo Abe has made with structural reforms designed to bolster productivity and growth.
The reforms constitute the third of the three “arrows” his economic policy, “Abenomics”, has been based on. The first is monetary policy, with the Bank of Japan massively expanding its money-printing programme in recent years; the second is fiscal stimulus.
The third has focused on corporate governance. There has been a push for more independent directors on company boards. Stock buybacks are on the rise, and relationships with shareholders are improving. The shake-up should help generate better shareholder returns and overall growth.
A key consequence of the third arrow has been a significant rise in the number of companies paying dividends. Previously, “companies tended to hoard cash”, Tom Becket of investment management group Psigma told The Times. What strikes Becket, however, is that “nobody seems to be talking much” about Japan’s corporate-governance revamp. The overlooked market thus offers good value.
One reflection of that is that the Topix index currently yields more than America’s S&P 500: 2.3% compared with 1.95%.
A tight labour market
The macroeconomic backdrop also looks encouraging. The unemployment rate has slipped to a mere 2.4%, the lowest figure in 26 years. “Over the last five years, Japan has done an extraordinary job of squeezing more jobs out of a contracting pool,” says Jonathan Allum of The Blah.
Having long opposed immigration, Japan is now granting foreign workers short-term visas for the tightest sectors. This labour-market tightness is gradually bolstering wage growth. That bodes well for consumption, which accounts for 60% of GDP. Spending by households and businesses helped ensure that GDP rebounded to an annualised rate of 1.4% last quarter, after shrinking in the third quarter.
The medium-term outlook, then, is auspicious, while a short-term boost for the stockmarket may also be on the cards. Japan’s economy is highly exposed to China’s, so progress on the trade front would be excellent news, as Jeffrey Halley, senior market analyst at Oanda, told Bloomberg. If “an acceptable deal gets over the line, we should see foreign buyers returning to Japan’s equities in force”.