Abe’s third arrow

by

3 Mar 2015

From the risk-seeking actions of the world’s biggest pension fund to the unique approach to corporate governance and stewardship, Japan’s markets are being transformed by Abenomics. Chris Panteli reports.

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From the risk-seeking actions of the world’s biggest pension fund to the unique approach to corporate governance and stewardship, Japan’s markets are being transformed by Abenomics. Chris Panteli reports.

The changes within the GPIF are part of a  broader  integration of good governance practices  in Japan set out under the third arrow. Last year  saw the launch of the JPX-Nikkei  400 share  index,  comprising Japanese companies that combine  higher returns on equity and good corporate  governance. GPIF is already  an investor, tracking  the new index passively through a DIAM Asset  Management fund.

“The JPX 400 index consists of 400 companies  and is based on market cap, but includes governance  issues and other things,” says DIAM chief  executive Hideto Yamamoto.

“It is part of the government’s decision to  increase  governance measures in Japan in an  effort  to increase  equity returns.”

As part of these measures, a stewardship  code  has been introduced for larger investors, with a  corporate  governance code for companies set to  follow.

“The stewardship code is really interesting. If we  own shares in a company the major shareholders  are quite often going to be Japanese domestic  institutions  such as life insurance companies,”  says Threadneedle’s Williams.

“If they are completely  passive as shareholders,  you know that there’s a large percentage of the  shareholding structure that is never going to say,  ‘why don’t you pay a bit more of a dividend?’”

Dan Mannix, chief executive of RWC, agrees: “In  the typical  Japanese  corporate view of stakeholder  capitalism,  shareholders were ranked so far  below  customers,  employees and global society  in general,  that they had become all but invisible.  Things are, however, changing,” he says.

Mannix also points out that the approach taken  by Japan is unique.  “Interestingly, the stewardship  code has preceded  a national set of corporate governance  principles.  This makes it the only country in the world to  come at the question of how companies should  best be run from the investor  side first – perhaps  a sign of a pragmatic assumption that without  the investment side of the governance coin, companies  may well be slow to comply with such  corporate  principles, which are likely to be voluntary  in any case.”

There may be cultural reasons why stewardship  and governance have never caught on in Japan:  with companies traditionally owning shares in  other companies, they rarely pressed each other  for higher returns or dividends, but as new investors  enter the market, this is now changing. Furthermore,  Mannix believes these traditions may  actually benefit stewardship in future.

“It might be argued  that the philosophical  barriers  to such an approach are less formidable  in Japan  than anywhere else,” he says.

“The old networks of zaibatsu, keiretsu,  cross-  shareholdings and the rest may have  resulted  in institutionalised sclerosis in Japanese  business  but they were, at least, based on  assumptions  of mutual support, and not the kind  of open market confrontation seen with the US  model of shareholder  engagement in general.”

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