Turning Japanese: equities in the Land of the Rising Sun

2 Jun 2017

Attractive valuations, improving governance and rising returns could make Japanese equities a good fit for cashflow-hungry pension funds. Mark Dunne takes a look.

“Japan has the best earnings momentum of any market just now and signs of improving corporate governance could add a further boost as the year unfolds.”

John Bilton, JP Morgan Asset Management
Japan is living up to its billing as the land of the rising dividend. Japanese companies handed ¥12trn (£87bn) to shareholders in 2016, compared to the ¥8trn they paid in dividends nine years earlier. Further growth is expected as the government increases pressure on boards to deploy the huge cash piles they have traditionally sat on. The 30% pay-out ratio recorded in 2016 is largely thanks to reforms introduced by Prime Minister Shinzo Abe. After a debtfuelled equity bubble popped in 1989 the country has struggled against low growth, deflation and a national debt stretching to 229% of GDP. Rising longevity and low birth rates have also hindered attempts to revive the economy. Breaking the cultural practices that have kept some companies in their comfort zones, where they hoard cash and treat shareholders with indifference, has been one of Abe’s core reforms. This has included setting return on equity targets and appointing more independent directors. The intention is to boost corporate earnings and investment as well as improve governance, which should whet the appetites of cashflow-hungry investors. “A greater focus on capital efficiency and shareholder value is helping to put Japanese corporates, and in turn, the broader economy on a sustainable growth path and rekindle lasting interest in Japanese equities among global investors,” Jun Tano, who manages the Fidelity Institutional Japan fund, says.

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