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Revitalising an undervalued market: is Japan finally prioritising shareholders?
Akira Horiguchi
Christophe Braun
2023年11月15日
Japan is looking to modernise its corporate landscape and prioritise shareholders – but after many false dawns, is this time different?
The Tokyo Stock Exchange has asked companies to improve profitability and valuations – focusing on those with price to book ratios (P/B) below one. If a business generates return on equity above cost of capital, its P/B should improve and ways of achieving this include reducing excess cash on balance sheets and shedding underperforming subsidiaries.
Japan Inc. is cash heavy
Percentage of index constituents with positive net cash positions
As at end August 2023. Net cash reflects the difference between the cash and short-term securities reported on a company's balance sheet and its outstanding debt. Sources: Capital Group, FactSet, Refinitiv Datastream, Standard & Poor's, STOXX, TOPIX
In the short term, this backdrop has boosted Japanese equities to highs not seen since the late 1980s, driven by value stocks. Meanwhile, Capex and foreign direct investment are rising and the country is among few trying to create inflation after decades of deflation.
Capital Group engaged with over 100 Japanese companies on capital allocation this year and several show improving shareholder return policies. But according to portfolio manager Akira Horiguchi, even if companies with a lower book value improve this to above 1x, the index may only rise a relatively small percentage (around 15%) because most stocks involved are not large constituents.
“We believe these changes should not stop with companies below 1x book but evolve into something more broad-based,” he says.
“Many Japanese companies above 1x book do not earn a high enough ROE due to cash hoarding or insufficient business portfolio management. If we saw meaningful change here, there may exist a true opportunity for paradigm shift.”
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