Value push will mostly survive Japan election mess

Taken root. A decade-long effort to boost shareholder returns in Japan can probably continue to gain momentum. That's despite a drubbing at the polls on Sunday for the scandal-hit Liberal Democratic Party which cost Prime Minister Shigeru Ishiba's coalition its parliamentary majority.

The LDP - in charge of Japan for most of its post-war history - is synonymous with structural reforms that former Prime Minister Shinzo Abe kicked off in 2012. The goal was simple: improve national productivity after decades of deflation and slow growth.

Recent success stemming from that campaign has led the benchmark Nikkei 225 and Topix indices to smash through levels of late last seen before the country's asset price bubble burst more than 30 years ago. The rally was supported by Japan's introduction of a stewardship code in 2014 and, more recently, fair M&A guidelines which warn companies to weigh up takeover proposals with shareholders in mind.

It helps a lot that Hiromi Yamaji, the boss of Japan Exchange , has taken charge of that long official effort: The Tokyo Stock Exchange is wielding a stick, shaming individual companies that are not disclosing their plans to enhance shareholder value by excluding them from a list it publishes each month.

The upshot is clear: companies now hold fewer cross-shareholdings and have more independent directors on their boards. That is forcing companies into boardroom debates that can lead to better disclosure, and then to improved performance.

So while politicians bungle, Japanese company CEOs are likely to stay focused on growing high-return businesses, offloading underperforming ones, and shrinking the piles of cash on their balance sheets. Goldman Sachs notes buyback announcements this year are already 35% higher than the total for all of 2023. Shareholders are likely to remain pushy too: more than half of companies in the Nikkei 225 had one or more resolutions contested by at least 10% of voting investors at their annual general meeting in 2024, according to strategic shareholder services firm Georgeson.

Japan's next government, whoever leads it, may try to shore up its popularity by boosting fiscal spending and trying to delay raising interest rates. That would perhaps slow down the creation of a wealth management industry, but it would be unlikely to distract CEOs and shareholders too much. If there is any hesitation, the yen, which dropped to a three month low on Monday, will at least provide stocks with a short-term boost.

Context News

Japanese stocks rose on Oct. 28 as the yen fell to a three-month low after Prime Minister Shigeru Ishiba's coalition lost its parliamentary majority in the election held on Oct. 27. His Liberal Democratic Party (LDP), which has ruled Japan for almost all of its post-war history, and junior coalition partner Komeito took 215 seats in the lower house of parliament, short of the 233 needed for a majority. The LDP previously held 247 seats and Komeito held 32.