This week the Tokyo Stock Exchange launched its biggest shake up since 1961 in a bid to attract foreign investors. The exchange has scrapped a “cumbersome system of four separate boards” for a more streamlined split into three new sections – “prime, standard and growth”, say Eri Sugiura and Leo Lewis in the Financial Times.
A key part of the plan is to make prime a more exclusive category than the unwieldy “first section” it replaces. That includes tougher requirements on market capitalisation and corporate governance (an area in which Japan has long lagged).
One-third of board seats are supposed to be held by outside directors. Such rules are meant to prod firms towards reform. But numerous loopholes have disappointed critics, with companies let into prime even if they fail to qualify so long as they show how they plan to do so “at some unspecified point in the future”. The reform looks to be a “squandered opportunity”.
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Cheap yen, cheap stocks
But other developments could draw foreign investors to Japan. Core consumer inflation is still running at just 0.6% per year, so the Bank of Japan is sticking to its policy of ultra-loose money, unlike other central banks. That includes unlimited purchases of government bonds to keep borrowing costs low, meaning that overseas currencies offer higher rates. That’s prompting bond investors to sell the yen, which has slumped to a seven-year low against the dollar.
Loose policies and a weak yen should be a tailwind for stocks. “Taking comparative rates of inflation into account, the yen has halved in value against the dollar since 1995, taking it back to levels not seen since the early 1970s,” says Peter Tasker in Nikkei Asia.
That makes Japanese products and services look “extraordinarily cheap”. That will incentivise the onshoring of supply chains – a theme in vogue at the moment – as well as “the mother of all tourist booms” once global travel picks up. The “bargains” on offer in the “great Japanese discount store… will not be there forever”.
That said, long-term investors still need to see economic reforms, not a cheap currency. Tokyo has been “courting a weak yen” for at least two decades, says William Pesek, also in Nikkei Asia. That has delivered “record profits” for export-oriented businesses, but it has also depressed wages, acted as a drag on innovation and investment, and reduced “the urgency to restructure the economy”.
In 2013, then-prime minister Shinzo Abe promised bold changes to end Japan’s stagnation. But of the “three arrows” in his programme – easier money, fiscal reform and less red tape – only the monetary one “was fully deployed” and now even “that one is falling to earth” along with the yen. “If the secret of success was a weak currency, then Argentina and Venezuela would be booming.”
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