Japan is looking attractive on the back of the increasing importance of shareholder value in its sto...
Japan is looking attractive on the back of the increasing importance of shareholder value in its stock markets and lower valuations.
Denis Clough, who runs the Tokyo unit trust and Japan Growth investment trust, said around half of Japanese companies are trading at below their book value.
In addition, the increasing trend towards merger and acquisition activity is focusing the minds of Japanese management on improving returns for shareholders. Japanese companies have an average price to book value of 2.5 compared with 5.6 for the US, 4.4 for Europe excluding the UK and 3.9 for the UK.
Clough said: "An important development for Japan going forward is management change. If one looks at the problems of Japan over a long period of time one of the key factors has been management has not been interested in shareholders. It has been more interested in growing the size of the business and winning market share. This has been one of the key reasons for the stock market and the economy doing badly.
"Consolidation in the banking industry and the pressures on corporations to raise profitability are accelerating the pace of the unwinding of cross shareholdings. These allowed management not to be concerned about shareholders. As long as all the companies agreed among themselves not to worry about profitability they could get away with it."
The level of merger and acquisitions activity in the region has tripled since 1995 when it represented just 2% of stock market cap. This has increased to about 6% by 1999.
Clough said: "There is now more awareness of the threat of being taken over. One can get the benefit of companies one holds being taken over and one also benefits from a wake-up call to management concerned about their companies being bought. The pressures are now similar to those on management in the US and Europe."
GDP forecasts for Japan have risen sharply this year with part of this influenced by an improvement in consumption and also corporate capital spending, particularly technology expenditure.
While Clough is mildly positive on growth he said he was concerned over the Japanese public sector deficit.
"The state of Japanese government finances is awful and getting worse while the deficit is 7.5% of GDP. That has to be bad for equity markets and means that bond yields are higher than they would be otherwise."