On the fateful day of December 29, 1989, Japan’s stock market experienced a significant setback. The Nikkei index had soared to an all-time high of 38,916, only to experience a sharp decline. Investors who had optimistically bought at the zenith were left ruing their choices. Fast forward three decades, and the market still hadn’t eclipsed that landmark figure. Yet, recent trends hint at a possible revival of the Japanese stock arena.
This year, the Nikkei has surged by 20%, achieving its highest in 33 years, albeit still shy of the 1989 pinnacle. The esteemed investor, Warren Buffett, during his recent sojourn to Japan in April, lauded his Japanese stock acquisitions. A confluence of factors is credited for this revival.
Past revelations of covert deals and share cross-holdings eroded confidence in the Japanese corporate landscape, making investors wary. But the current scenario is shifting.
The persistent economic downturns in the US and Europe starkly contrast with Japan’s consistent economic ascent. As the US hikes its interest rates, Japan’s central bank persists with its aggressive monetary easing, aiming to spur growth. The diminishing strength of the Japanese Yen vis-à-vis the US dollar augments the profitability of Japanese exporters.
Yet, one pivotal element often goes unnoticed: corporate governance. Delving into the repercussions of the 1990 asset bubble burst provides clarity. The Bank of Japan’s drastic rate cuts to invigorate domestic expansion led to an unchecked credit surge. This resulted in companies pouring funds into infrastructure and real estate, inflating both land and stock values. However, the economic edifice crumbled when interest rates were hiked in 1989, unmasking a tainted corporate realm.
This transformation is the culmination of a sustained strategy. The tri-pronged approach introduced by ex-Prime Minister Shinzo Abe in 2012 was devised as an economic lifeline. While the first two arrows were monetary and fiscal policies, it’s the third – structural reforms or corporate governance – that’s making waves.
Historically, Japan has been wary of foreign investment funds meddling in their corporate affairs. But the inception of the Corporate Governance and Stewardship Codes has galvanized Japanese investors to be more proactive in corporate decisions. Shareholder proposal numbers have surged from a mere 5 in 2015 to over 60, and activist funds have ballooned from under 10 in 2014 to almost 70 in 2023.
Companies, once notorious for hoarding cash, are now disbursing unprecedented dividends, propelled by the focus on robust corporate governance. The Tokyo Stock Exchange’s assertion that a majority of firms are undervalued has prompted companies to utilize their cash reserves to repurchase shares at elevated prices. This not only benefits shareholders but also amplifies share value, with buybacks peaking last fiscal year.
This rejuvenated emphasis on corporate governance is rebuilding faith in the Japanese framework. Investors are lauding the dedication to stringent corporate governance and shareholder-centric approaches. Whether this momentum will restore the Japanese stock market to its heydays is speculative. Yet, for those investors who have adhered to the ‘buy and hold’ mantra since 1989, the future looks promising.
