What’s it going to be, Japan: sharkor mole?

March 24,2019

Brokers and management gurus all love the great white shark. What more perfect metaphor for momentum than a magnificent, razor-toothed predator that must keep swimming or perish?Sclater’s...

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Brokers and management gurus all love the great white shark. What more perfect metaphor for momentum than a magnificent, razor-toothed predator that must keep swimming or perish?

Sclater’s golden mole, which is ugly and ungainly and must dig or die, is a less popular choice.

To the bullish eye, the Japanese stock market in early 2019 is having a great white moment. The Topix is about 3 per cent lower than where it was a year ago, but has risen steadily since January and is now 10 per cent higher since the turn of the year. There are a few good reasons for this — a docile yen, or fading fears of a global slowdown — but this is a market whose momentum often depends upon a strong, sharky narrative, and it currently has one.

More and more, there are signs of a fundamental emboldening of investors — and an ebbing confidence among companies that executives can ignore them. Wherever you look, shareholder capitalism seems to be doing what it always hoped it could achieve in Japan, but was too often thwarted.

Within the past few weeks, King Street Capital has said it will ask fellow shareholders in Toshiba to help it clear out most of the board and fill those seats with independent directors, including one of the co-founders of the New York based fund.

King Street may have been emboldened in its endeavour by a campaign by ValueAct Capital, another US hedge fund, which managed in January to convince Olympus to give it a seat on its board.

Last week, a group of foreign and Japanese investors in Lixil called for the dismissal of the CEO and went to the ultra-rare length of requesting an extraordinary general meeting to make that happen. This is all groundbreaking stuff.

Elsewhere in the market, investors’ attempts to extract some of the value locked away in corporate Japan have also been increasing in frequency and ambition. A small printing company, Kosaido, whose market capitalisation is far smaller than its tangible book value, is now at the centre of a tussle between one of the world’s biggest private equity groups, Bain Capital, and one of Japan’s most aggressive families of activists, Yoshiaki Murakami and his daughter Aya.

All this is happening ahead of a Japanese annual general shareholders’ meeting season in June that could see significantly greater pressure on managements, as normally docile Japanese institutional investors vote their shares for the first time in decades. For Japan’s market to remain buoyant, according to the great white shark theory, this kind of snarling, predatory activity must both succeed and continue.

As ever, though, there is a well embedded and pessimistic view on Japan that holds that signs of progress — especially those that boost the market — are bound to disappoint.

Switch the shark for Sclater’s mole, and the momentum we see in Japan is not that of a great predator but of a small animal that must constantly scrabble to maintain its body heat.

The great test of metaphor is imminent. Simultaneous with the spike in activism since the start of 2019 have been signals from the Tokyo Stock Exchange that it wants to address the fact that 60 per cent of Japan’s 3,650 listed companies sit in its “first section”. The TSE has asked a panel of experts to recommend a formula for a radical shake-up, and has invited other interested parties to comment. The early signals, which have contributed strongly to the brokers’ narrative of progress, were that the exchange was thinking big and bold. It would create a new top tier of stocks and set a minimum market cap requirement of between ¥50bn ($451m) and ¥100bn. There might even be stringent governance-related requirements on top of that.

The calculations were exciting: even a ¥50bn floor would eject about half of the 2,135 members of the first section, leaving a streamlined, large-cap Topix index that would better focus investors on Japan’s treasures. The scramble to make it into the top flight, said bankers, would be a highly investable theme as companies looked for mergers to get themselves over the threshold, or gave up and opted for a management buyout.

The more recent signals, though, have been far less encouraging. The figure of ¥25bn as a lower size threshold has made its way into Japanese media coverage, suggesting that a radical vision for the TSE reboot has now been scaled back into the exchange’s more familiar pattern of compromise and timidity.

There will still be a change, and Japan will still be able to claim that there is momentum behind that change. It is just that, once again, it may be the movement of a mole rather than a shark.

—The Financial Times Limited


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