Unlocking value in Japan

Global shareholder activism reached a record high in the first half of 2024, with 147 activist campaigns launched, driven by the United States and Japan. US activity rose 15% to 61 campaigns compared with the same period in 2023. Japan reported 38 campaigns versus 14 a year ago, almost triple.

Behind the substantial uptick in Japan are structural changes in the capital markets and a significant shift in Japan’s corporate governance culture.

In April 2022, Tokyo Stock Exchange restructured the stock market from four to three segments, namely Prime, Standard and Growth, based on liquidity, corporate governance and other criteria. Then, on March 31, 2023, it requested that all listed companies on the Prime and Standard Markets “take action to implement management that is conscious of cost of capital and stock price.” The key focus is to increase capital efficiency of companies, especially those with a price-to-book ratio (PBR) of less than 1.0.

As of October 31, 2024, 88% of Prime Market listed companies (1452) and 47% of Standard Market listed companies (742) have disclosed initiatives or status. Regarding companies with market capitalization of JPY 100 billion or more and with PBR below 1.0, 98% have made the disclosure.

However, disclosure is one thing and improvement is another. As of September 30, 2024, about 38% of TOPIX 500 companies were still trading below book value. Return on equity of Japanese listed companies is expected to be around 8.6% for the fiscal year ending March 2025, well below the United States at 20% and Europe at 14%.

The good news is that almost half of these companies are cash-rich. Below is a comparison between the median of the largest 500 listed companies in the United States and Japan.

Source: Compustat. As of April 1, 2024

A solid balance sheet facilitates measures to increase shareholder return and unlock value. The following progress in various aspects is encouraging.

• Dividend increase
  According to Nikkei, about 40% of companies plan to increase their dividends for the fiscal year ending March 2025. Total dividends are expected to reach a record high for the fourth consecutive year at approximately 18 trillion yen, up 8% from the previous year, and up 50% from five years ago.

• Share buybacks
  From April to September 2024, 649 listed companies in Japan set aside 10.65 trillion yen to buy back shares, which is almost a double from a year ago. Some of these companies have low PBR, but many with high PBR also bought back shares to improve capital efficiency.

• Management buyouts
  2023 was a record-breaking year in terms of the transaction value of Japanese management buyouts (MBOs).

Number of MBOs and transaction value

Source: Bloomberg as of December 2023

• Divestment of non-core assets
  This is a popular tactic that activists in Japan are applying. It is estimated that in Japan, there is a huge gap of 22 trillion yen between real estate assets’ book value and market value. For example, companies such as Keisei Electric Railway, Tokyo Gas and Sapporo were all pushed by activists to sell some non-core real estate assets.

As the corporate culture in Japan is getting more investor-friendly, the line between shareholder activism and stewardship is getting increasingly blurred. Engaging in dialogues with management does not have to be hostile. At Global Alpha, we have been vocal at proxy voting and company meetings. In many cases, we voted against management in Japan due to board independence and board diversity, and suggested companies buy back shares, increase dividends and divest non-core assets. We are encouraged to see the progress in Japan and believe a greater emphasis on growth, profitability, sustainability and corporate governance will continue to benefit shareholders in the long term.