Hunting for quality growth in Japan

When the Tokyo Stock Exchange itself asks to meet you to hear feedback on its governance code, you know something is afoot.

This is what happened to me a couple of weeks ago, for the first time after twenty years of covering Japanese Equities. The meeting coincided with June’s officialisation of the Japan Governance Code, circulated by the government itself. It has kick-started a new trend in Japanese corporate governance with the key aim of: vying for the best shareholder return.

Japanese companies always had the inclination to respect shareholders, but were held up – not by culture, nor tradition, but by tax. Seven decades of mostly impotent administrations accommodated the egalitarian framework set up by the New Deal Occupation, and the Abe government’s real iconoclasm is to challenge that framework. As soon as Abe cut tax, corporates started to respect shareholders.

Many companies have already announced industry leading improvements in shareholder returns. Keyence tripled its dividend per share for the financial year March 2015. Unicharm has announced its three fifteens goals: 15% return on equity, 15% earnings before interest and tax-margin and 15% sales growth. Fanuc opened up for the first time to its minority investors by creating an investor relations department and a dividend payout target of 30%. Amada committed to 100% payout for two years.

Perception of the overall market defines overall risk premia, so our bottom up stock selection is helped by improvement in the general picture. On a recent trip to Japan our ESG team met with 14 companies on a top management level as well as industry experts and politicians on governance and general ESG issues. While many companies are just starting to embrace the idea of corporate governance, our colleagues sensed that “this time is different”. 10 out of the 14 companies, for example, already had two independents on their boards. On a broader level, for example, 1,300 companies in TOPIX have at least one independent or outside director, up from 844 last year.

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