To both economists and ordinary people alike, the Japanese economic story since 1945 is best thought of in cinematic terms. If the ‘miracle years’ following World War II were like watching the economic equivalent of an action movie, after the bubble burst in the early 1990s, watching the Japanese economy was like sitting through a particularly dull golf tournament. It seemed as if nothing would ever change, and that Japan would remain stagnant, or even go through gentle managed decline.
But it hasn’t turned out that way. In the last few years, we have seen tremendous corporate governance reform in Japan – almost in the blink of an eye. While it might seem like a niche topic, it has the potential to deliver incredible returns for investors and international businesses moving forward.
To fully understand contemporary Japanese corporate governance reform, it is helpful to understand what it looked like during the miracle years between 1960 and 1990. At the time, companies were designed to reward Japanese banks, the main players in the economy and the providers of the significant lines of credit that, in retrospect, drove the miracle. The top companies during the 1970s could easily generate 20% returns to their underwriters, feeding a cycle of further investment – but companies did not necessarily consider how to reward retail investors.
In the 1980s and 1990s, pushed by US and European efforts – starting with the 1985 Plaza Accords – to make Japan less competitive, the Diet began to introduce corporate governance reform, reducing the scope of administrative guidance, among other aspects. In reality, reform was limited – there was little incentive for companies to reward retail investors instead of the big banks. Companies created ‘value traps’, hoarding cash and caring little about providing returns, delivering buybacks or trading above book value. It was in the companies’ interest to hoard cash, particularly after the Plaza Accords devalued the yen and led to significantly reduced competitiveness (especially compared to South Korea and China, the real winners of the Accords).
This all attracted negative media attention. As James Mackintosh of the Financial Times once wrote, ‘whenever Japanese company stocks look cheap, they get cheaper – and stay cheap’; while Henry Tapper, an independent analyst, has called Japan ‘the country where value investors go to die’. Even a cursory Google search will find dozens of similar opinions.
Perhaps Tokyo was listening. Corporate governance reform kicked in nearly overnight in 2023. Just recently, the Hong Kong-based investor Oasis Management pushed Fujitec to replace its directors with candidates from their own shortlist, and ousted the chairman: the classic hostile takeover. Instead, they looked to deliver value to investors, rather than coddle existing management. Such a move would have been unthinkable during the golden years, when stability was prized above all.
Likewise, the Tokyo Stock Exchange is currently ‘encouraging’ (Japan-watchers will know that this really means ‘requiring’) listed companies to ‘demonstrate a better use of capital’ – particularly by showing how they can deliver benefits to shareholders. Japanese companies have recently shown more willingness to engage in buybacks, which reached a 16-year high in 2023. Similarly, Mitsui’s recent buyback was its largest ever. Warren Buffett, whose activities often run ahead of major market shifts, has been ploughing billions into the Japanese market to chase higher returns, now that his analysts are reporting more confidence following reforms. After nearly thirty years of stagnation, the tide may well be turning.
If companies are able to trade significantly above book value, retail investors have the opportunity to make considerable returns – even on par with investing in the US S&P 500. Foreign investors made inroads to the Japanese market after the crash early on in the pandemic made stocks available at a huge discount. It will be interesting to see if Japanese law catches up with what is happening on the ground, and if the trend is sustainable in the long run.
