Peer pressure is new activist tool for Japan Inc

JSR

10/01/2024 12:49

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Anshuman Daga
       SINGAPORE, Jan 10 (Reuters Breakingviews) - A different
kind of activist campaign may be just enough to force corporate
Japan to shake off its stodginess. Next week the Tokyo Stock
Exchange will reveal which of its listed companies heeded its
call last year to devise a strategy for improving valuations and
capital efficiency. The bourse is betting this will shame the
laggards into action. Such peer pressure could be a game-changer
in the consensus-driven country that is becoming a favourite of
foreign funds.
    The move comes as the ruling Liberal Democratic Party is
engulfed by a fundraising scandal that has already led to one
arrest and driven down approval ratings for Prime Minister Fumio
Kishida to some 20%. The country is also reeling from a New
Year’s Day earthquake and a plane crash at Tokyo airport. It’s a
tricky start to 2024 but Japan’s drive to enhance shareholder
value will survive any potential change of government.
    Authorities have been trying for years to get Japan Inc to
up its game. But stubborn practices keep valuations low.
Cross-shareholdings are common, with a median of 11 equity
holdings per company in the Topix index  .TOPX . They're
money-hoarders, too: 46% of MSCI Japan index constituents
reported a net cash position compared with 14% in the MSCI U.S.
index, notes Jefferies. They're not keen on borrowing, either,
with median net gearing at 2% compared with more than 51%
Stateside.
    The mood is changing, though. Last year, the government
unveiled new guidelines aimed at boosting mergers and
acquisitions to improve the economy's competitiveness, while
also cracking down on some defence tactics. Meanwhile, the
momentum for share buybacks is strong after a record 2022.
    The bourse's campaign is expected to have the biggest impact
on companies that trade below book value. Some 46% of the 1,700
firms on the exchange's prime market were stuck either at or
below par on that metric as of November, far higher than the 7%
figure for the S&P 500 and 19% on Europe's STOXX 600 index, per
Goldman Sachs.
    By last July, only around 270 companies whose financial year
ended in March had disclosed plans. But the exchange's push
already seems to have had some effect. At the start of 2023, 52%
of firms were trading at or below book value. Last year, Toyota
Motor  7203.T  outlined plans to trim its stakes in car-parts
supplier Denso  6902.T  after paring its holdings in telecoms
company KDDI  9433.T , while Sony  6758.T  may spin off its
finance unit.
    There's also an uptick in deals not often seen in Japan:
management-led buyouts, like the $5 billion deal Taisho
Pharmaceutical  4581.T  unveiled in November; and domestic
takeover fights, like the competing offer Dai-ichi Life  8750.T 
launched last month for employee-perks manager Benefit One
 2412.T .
    Meanwhile, more companies are being targeted by pushy
shareholders. ValueAct Capital, for example, has lobbied for
change at outfits including Seven & i  3382.T  and JSR  4185.T .
Last month the U.S. fund revealed a 5% stake in Nihon Kohden
 6849.T , five years after it nudged another Japanese
medical-devices company, Olympus  7733.T , into a successful
overhaul. 
    Jefferies reckons up to 80% of listed firms will eventually
respond to the TSE's request. The prospect of a huge increase in
the number of efficiently run, deal-ready Japanese companies
emerging from a decades-long deflationary rut should entice more
investors into a $6 trillion stock market that became Asia's
best major performer last year after rallying 28%. M&A bankers
will be sharpening their pencils, too.
    Follow @anshumandaga on X
         
    CONTEXT NEWS
    The Tokyo Stock Exchange will on Jan. 15 publish a list of
companies that have disclosed information on how they intend to
improve capital efficiency and valuation. The list will be
updated monthly.
    The bourse last year pushed all its listed companies to take
action to boost their valuation, including those that trade
below book value or those with a low return on equity or high
cost of capital.

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Graphic: Japan stocks rallied in 2023    https://tmsnrt.rs/41VQDGm
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 (Editing by Antony Currie and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  DAGA/ 
anshuman.daga@thomsonreuters.com; Reuters Messaging:
anshuman.daga.thomsonreuters.com@reuters.net))