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OPINION

Published 20:09 IST, January 10th 2024

Peer pressure is new activist tool for Japan Inc

Tokyo Stock Exchange is set to reveal listed companies working to improve valuations and capital.

Anshuman Daga
Anshuman Daga
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Naming is the game. 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.

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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. 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.

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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 outlined plans to trim its stakes in car-parts supplier Denso after paring its holdings in telecoms company KDDI, while Sony may spin off its finance unit.

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There's also an uptick in deals not often seen in Japan: management-led buyouts, like the $5 billion deal Taisho Pharmaceutical unveiled in November; and domestic takeover fights, like the competing offer Dai-ichi Life launched last month for employee-perks manager Benefit One.

Meanwhile, more companies are being targeted by pushy shareholders. ValueAct Capital, for example, has lobbied for change at outfits including Seven & i and JSR. Last month the U.S. fund revealed a 5% stake in Nihon Kohden, five years after it nudged another Japanese medical-devices company, Olympus, into a successful overhaul.

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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.

Updated 20:09 IST, January 10th 2024