Matthews Asia's Kenichi Amaki assesses the pace of change in Japan.
The need for an improvement in Japanese corporate governance is not a new topic, and it has received a lot of attention in recent years. However, change never happens quickly in Japan and some investors are now asking whether it's making decent headway.
Corporate governance progress should not be underestimated: According to a recent survey by Japan Investors Relations Association, some 60% of companies said they now have a capital policy in place - up from 32% in 2015 - while some 57% have a return on equity (ROE) target. In comparison, when I visited Japanese companies 15 years ago, many managers wouldn't know what ROE was and what it meant for investors. Today many of them do have written ROE targets in their presentation materials and understand that it is important for investors.
The same survey also showed that some 44% of companies are now aware of the cost of equity, though I somewhat doubt that this is true. Five to 10 years ago, the cost of equity was a completely foreign concept to the typical Japanese company -- for them equity was free money, money they didn't have to pay back. Nowadays, some at least, know there is a certain cost.
However, we should not tar all companies with the same brush: Those companies that have large overseas operations, or derive a large portion of their revenues from outside of Japan, tend to have better corporate governance practices in place. This is because they operate in environments in which they are required to follow governance rules. Domestic firms, which have not been subject to the same extent of foreign competition, tend to be unaware -but not ignorant- of the generally accepted corporate governance practices.
Recently, we have been able to engage with some companies that previously did not meet with investors, and I have also witnessed some improvement in how companies disclose information.
Company managers appear to be thinking more deeply about the business' capital structure, which is being demonstrated in their share buy-back announcements.
Meanwhile a lot of companies have multiple independent directors these days, which is impacting the nature of conversations at Japanese board meetings. It's true that many companies are just trying to fulfil the number that is stipulated by the corporate governance code, but at least there is now some awareness that corporate governance can no longer be ignored. It is slowly, but surely moving ahead and it is likely to lead to improved returns on capital going forward.
We are already seeing higher dividends and stronger share buybacks, but we still have a long way to go. Japan's corporate governance reforms might not be charging ahead, but as we all know from the story of the hare and the tortoise, speed is not always the key factor in winning. The truth is that change takes time in Japan and investors will need to be patient to reap the rewards.
For our latest views on investing in Japan, please visit https://global.matthewsasia.com/japanfund/
For Institutional/Professional Investors Only.
Past performance is no guarantee of future results. The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC ("Matthews Asia") and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. Nothing set out in these materials is or shall be relied upon as a promise or representation as to the future.
This document is not a Prospectus/Offering Document and does not constitute an offer to the public. No public offering or advertising of investment services or securities is intended to have taken effect through the provision of these materials. This is not intended for distribution or use in any jurisdiction in which such distribution, publication, issue or use is not lawful. An investment in Matthews Asia Funds may be subject to risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The current prospectus, Key Investor Information Document or other offering documents ("Offering Documents") contain this and other information and can be obtained by visiting matthewsasia.com. Please read the Offering Documents carefully before investing as they explain the risks associated with investing in international and emerging markets.
In the UK, this document is only made available to professional clients and eligible counterparties as defined by the Financial Conduct Authority ("FCA"). Under no circumstances should this document be forwarded to anyone in the UK who is not a professional client or eligible counterparty as defined by the FCA. Issued in the UK by Matthews Global Investors (UK) Limited ("Matthews Asia (UK)"), which is authorised and regulated by the FCA, FRN 667893.
