The “cosy relationships” between major companies in Japan is being broken up by a wave of corporate reform that will bring rewards for long-only investors.
Timothy Griffen, portfolio manager for Lazard Asset Management, a 25 year veteran of Japanese investments who has made money in falling markets through shorting stocks, says Shinzo Abe’s three arrow reforms will pave the way for greater mergers and acquisitions.
Abe, who was re-elected as prime minister on Sunday, has brought in stewardship reforms that have led to the end of the “cosy relationships” that allowed large companies to hold mutual shareholdings in each others’ companies, says Griffen.
Companies will now have a higher incentive to raise their share price to avoid being acquired and are more likely to do this through raising productivity and reducing costs.
Griffen sees Abe’s policies, which include labour reform to get more women in the workforce, promoting inflation, greater public private partnerships and impending corporate governance reforms, as bringing a five-year momentum of change and growth.
Domestic companies focused on housing and finance are set to benefit, while Japanese advances in game console manufacturing and robotics make companies in these sectors also appealing.
Property companies should profit from the impacts of a building boom before the 2020 Tokyo Olympics, better computer generated building techniques aimed at designing earthquake resistant homes and rising property prices in all regions of Japan after 20 years of deflation.
The long deflationary period that started in the 1990s saw consumers delay purchases in the knowledge that in six months’ time items such as homes would be cheaper.
Griffen likened the rapid changes taking place in Japan as similar to the way the country transformed itself from an agrarian nation to a leading industrialised nation in the space of thirty years in the late 1800s after 300 years of isolation from trade and migration.
He also challenged the perception of Japan as an exporter of consumer electronics was misplaced, not least as many of these business lines were at threat from cheaper producers in Asia.
He added that common perceptions of the importance of exports to the Japanese economy were misplaced, pointing out that 65 per cent of GDP is driven by domestic demand.
Griffen estimates that Japanese companies receive one tenth of the analysis of US companies of the same size, owing to investors’ long term dis-satisfaction with the Japanese market.
One major barrier for growth in Japan is the high level of government debt, which has led to a rise the sales tax from 5 per cent to 8 per cent.