Engaging with Japan Inc on governance reforms

Japan has been a talking point of late, with reopening and inbound tourism, the unprecedented labour shortage and inflation acting as catalysts for pulling the Japanese economy out of decades of deflation.

Historically, Japan has had a challenging demographic backdrop, and its economy is heavily indebted while appearing to be structurally challenged. However, global inflation and rate hikes have recently created an exogenous shock for the country, and Japan has now entered unchartered territories in terms of CPI and the Japanese yen.

More specifically, post pandemic, while foreign tourist numbers are up, foreign worker numbers remain low, with structural labour shortage a major pain point. This shortage is making wage hikes and structural changes seem inevitable, and we are seeing evidence of companies placing stronger emphasis on employees and corporate governance reform. This is a potentially strong tailwind that could help pull the economy out of decades of deflation and restore an ’animal spirit’ in both corporate culture and market sentiment.

While we believe that Japan’s macro environment will be a net positive for Japan equity investors over the coming years, we have long argued that investing in Japan equity is not actually about Japan macro. The country is fertile ground for active stock pickers who seek to generate idiosyncratic alpha, and our fundamental research enables us to see solid investment opportunities from the bottom up.

We provide selective exposure to Japan equity, and our holdings tend to have high or improving ROIC, strong balance sheets and quality management teams. They are the stronger companies in terms of trends in business fundamentals and corporate governance reforms.

We recently presented to over 100 Japanese listed company CEOs and representatives on corporate governance reform in Japan. With a solid track record of nearly 10 years, we are recognised as a thought leader on ESG integration and long-term engagement, and we were one of three keynote speakers in a ‘Japan Engagement Partnership Day’, a selective event hosted by a global investment bank. In our note below, we provide the summary points from our talk.

In sum, companies determined to make the most progress in their core operations and governance reform should outperform over time, making active management the most compelling way to gain exposure to Japan equity over the long term.