Business changes make Japan promising

Gut eight years ago, Japan, which many investors had almost written off, saw new hopes spread under the term “Abenomics”. In the meantime, the namesake Shinzo Abe has said goodbye as Prime Minister and Yoshihide Suga has succeeded him.

Abe left a promising legacy for Yuichi Murao of the Nomura fund company. “One of Abenomics’ greatest achievements was ending longstanding deflation,” says the head of Japanese equities. “For 20 years, Japanese governments have struggled with chronically sluggish growth and sustained negative inflation rates. The measures taken by the Abe government have finally enabled the Japanese economy to escape the deflation trap. “

In retrospect, monetary policy has probably had the greatest impact. By pushing the yen to its lowest level since 2000, it supported the substantial recovery in corporate earnings. With the lowering of corporate taxes and higher infrastructure spending, fiscal policy underpinned growth. “In our opinion, however, the decisive achievement for investors is the trend towards better corporate governance. We expect this to be the secular force that continues to drive the return on equity of Japanese companies, ”said Murao.

This reform was probably Abenomics’ most notable achievement. In the past, the return on equity of Japanese companies was seen as low, in part because of the sometimes excessive cash holdings and low levels of debt. Changing this was a key objective of the growth strategy and one of the main reasons for the corporate reform codes. More and more companies were getting independent board members and working to increase their return on equity through a more efficient capital structure. “Share buybacks and dividend payments have increased. We believe that this trend will continue and survive the current crisis, ”is Murao’s forecast.

But despite positive structural changes in parts of the economy, it was not enough to change perception. Japan is still seen as a mature, slowly growing economy. Changing this will be one of the main challenges for Abe’s successor, Suga.

The main task is to increase potential growth. This would require measures to increase the active workforce, incentives for domestic and foreign companies to invest in Japan and deregulation that would enable companies to increase their added value.

“As we understand it, the high capital intensity and the associated costs of the manufacturing industries that dominate Japanese industry, such as the automotive and capital goods industries, explain a large part of the low productivity. We accept that it will not be easy to change these structures in the short term, ”says Murao. Improvements in productivity through changes in business models or industry consolidation are elementary so that the market can see higher long-term profit growth. “We hope that changes in regulation by the new Suga administration will pave the way for such changes.”

The Japanese stock market currently offers a good environment for selected investments. Because prices and profits have diverged substantially within the market, active stock selection has rewarded investors with good additional returns. “Nonetheless, we believe that the Japanese equity market has the potential for a meaningful general upward move. The low return on equity compared to other countries offers substantial room for improvement as soon as the transformation of company and industry structures begins. ”Murao expects a lot from the“ Practical Guidelines for the Transformation of Business Models ”recently published by the Ministry of Economic Affairs. Its aim is to encourage companies to make changes to their structure or their business processes in order to contribute to sustainable, long-term growth. “We believe that these guidelines can give official impetus to the pressure from investors on the companies that the codes have generated. Together, this can accelerate the transformation of Japan’s entrepreneurial sphere. “

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