Richard Aston, manager of the CC Japan Income & Growth Trust plc and the Chikara Japan Income & Growth Fund reflects on last month’s Japan election. In the following analysis, Aston is keen to highlight why investors should cut through the noise as he explains why he’s so positive on the prospects for long term shareholder returns from Japanese equities right now.
Much of the news around Japan right now is focused on the results of the nation’s recent snap general election.
It’s not surprising. The failure of the Liberal Democratic Party (LDP) and its coalition partner Komeito to secure a majority in the lower house undoubtedly adds some uncertainty to Japan’s political future.
Still, investors would do well to cut through the noise and focus instead on the fact last month’s election is, in our opinion, unlikely to have a lasting, meaningful impact on the Japanese listed equities.
In a year where nations worldwide are being plunged into uncertainty under new leaders, the common political goal in Japan of continued corporate governance reform offers a rare prospect of consistently and significantly increasing long-term shareholder returns.
Continued corporate governance reform
Efforts to drive shareholder value among Japanese companies have been increasing under the LDP for more than a decade now.
These efforts began with the introduction of stewardship and governance codes under former PM Shinzo Abe. They were cemented during Covid, when corporate Japan emerged as one of the world’s most resilient dividend payers. And they’ve since gathered even more momentum through the JPX Group’s repeated calls for listed companies to disclose how they plan to improve their capital efficiency.
These measures have consistently driven record highs of dividends paid, an expansion of share buyback programmesas well as an unwinding of cross-shareholdings in Japan over the years.
Right now, the pace of reform is greater than ever.
Japanese dividends are forecast to total a record 22 trillion yen in FY24 following a bumper results season in which 40% of listed Japanese businesses revealed plans to hike payouts. Meanwhile, share buybacks doubled to 8 trillion yen in H1 24, and are expected to reach a record 16 trillion over the year as a whole.
Now, a lot of focus is on the LDP’s next steps after what prime minister Shigeru Ishiba himself described as a “very tough” election.
The likelihood, at writing, is the LDP and Komeito will pull together a ruling government with a three-party coalition. The, admittedly less likely, alternative, is the opposition will unite to form an alternative coalition.
Whatever happens, though, we are confident that Japan’s focus on reforming corporate governance, increasing return on equity, and encouraging more meaningful shareholder returns will continue.
Ishiba has given no indication he will stand in the way. Neither have any of his opponents. After all, doing so would be a pretty bold move for a new leader as unlocking further shareholder value stands to encourage greater domestic and international investment thereby driving sustained economic growth.
The problem with election uncertainty
Further, we recently saw the owner of Tokyo Stock Exchange claim corporate governance has “only just begun” in Japan.
This sort of declaration offers a tantalising taste of where Japanese stocks are heading in spite of questions looming around the future leadership. Frankly, we can’t say the same about the investment case for other developed nations that have faced or are facing a major vote in 2024.
Take the UK. We saw Britain take a significant pivot to the left in July’s general election with the victory of Keir Starmer’s Labour party. Now, concerns around how the policies enforced by the party will impact businesses and individuals are weighing heavily on the FTSE.
The US is similar. The presidency is hotly contested between two candidates with wildly different approaches to pretty much everything. It’s likely we will see a great deal of volatility in the weeks and months following November’s election as the market adapts to the policies of whoever wins.
Japan – a prospect of stability
Investors would do well to cut through the noise around Japan and focus on the facts. Governance reform continues at pace benefiting both the domestic economy and foreign investors.
At a time where the more contentious elections are clouding visibility in many other developed markets, the prospect of consistently and significantly increasing shareholder returns in Japan seems pretty attractive.
Richard Aston is manager of the CC Japan Income & Growth Trust plc and the Chikara Japan Income & Growth Fund
