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A new dawn – Three ways Fumio Kishida can drive investment into Japan

  • Increasing domestic equity investment

 

Since the election of reformist PM Shinzo Abe at the end of 2012, the Japanese stock market has performed well, increasing in value roughly two-and-a-half times over. You wouldn’t know it, however, by looking at the country’s banking deposits, which have continued to rise at record pace in spite of low interest rates and rising fees.

Part of the reason for this is that with Japanese equity markets having been on a downward trajectory throughout much of the nineties and the noughties, the equity buying culture we see across many different developed markets today was simply not able to develop. However, since 2012, the Nikkei has been steadily reversing this trajectory but instead of making the most of their strong domestic market, many Japanese citizens continue to put their cash into the safety of a bank or international stocks chosen by their broker.

With the number of quality stocks on the Japanese market multiplying, and with dividends and share buybacks growing, we believe there is a real opportunity for Kishida to encourage more domestic investment via tax cuts on capital gains or dividends.

  • Continue to drive corporate governance reform

 

Japan’s corporate governance reforms began in earnest under former PM Abe, whose newfound, progressive approach immediately took off, with the country repeatedly delivering world-beating dividend growth as the boards of its companies were increasingly held to account by investors.

The scale of progress became clear during the pandemic. As other developed and developing nations suffered payout bonfires, Japanese dividends fell in 2020 by just 2.1% on average nationwide.

Corporate governance is likely to improve even further under Kishida. The politician was a long-term supporter of Abe and his methods and has done nothing to suggest that he will deviate from the current status quo.

Moreover, although the reform was originally spearheaded by the government, its main driver today is arguably the Tokyo Stock Exchange itself. Indeed, the index is currently in the process of finalising its biggest ever reorganisation with the goal of making listed firms boost their transparency, profitability, and liquidity across the board.

If Kishida can continue to drive corporate governance reform in Japan while also stimulating its economy and domestic stock market, we expect the net impact to be a reaffirmation of the country’s position as a leading global destination for income investors.

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