“This time is different” are the four most dangerous words in investing. But Japanese investors have reasons to be confident that positive changes are coming in the market.
Japanese stocks have risen to their highest levels since the 1990s, when the country’s famous asset bubble was deflating. The Topix index has gained 12% this year, making it one of the world’s best performing markets in 2023. And even famed investor Warren Buffett has cast a vote of confidence in the market—his investment major Berkshire Hathaway now holds more stocks in Japan. than any other country outside the US
But long-time Japanese investors may wonder whether the current rally is all that different from the false dawns they’ve seen over the past three decades. There are indeed grounds for optimism.
For one, the push to reform corporate governance started by former prime minister Shinzo Abe is bearing fruit. Shareholder activism is on the rise and the most prominent result is increased cash returns to shareholders. Total payouts from buybacks and dividends reached record levels last year and the ongoing earnings season will bring another record. For example, Mitsubishi, one of five Japanese trading companies owned by Berkshire, announced a $2.2 billion buyback last week.
While buybacks are common in the US, the increased payout is a huge deal for Japanese companies, which are sitting on huge piles of cash. According to Jefferies, about half of Japanese companies have net cash on their balance sheets, compared to 22% in the US. Total cash held by non-financial companies in the Topix index declined for the first time since 2011 as a result of the more generous payouts. , although they still have about $1 trillion in cash on their balance sheets, Jefferies said.
And Japanese companies are increasingly engaging in cross-shareholding, or diluting stakes in each other, to increase returns to investors. These cross-shareholdings reduce the return on equity and hence the valuation. According to Jefferies, about 54% of the companies in the Topix index are trading below book value, compared to just 7% in the S&P 500. Earlier this year, the Tokyo Stock Exchange urged companies that trade below their book value to come up with plans to improve capital returns.
As Japanese companies open up the unproductive cross-ownership trap and boost payments, investors will continue to be more willing to pay for them. This time it really could be different.
Write to Jacky Wong at jacky.wong@wsj.com