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Stocks

New breed of shareholder could lift corporate profits in Japan

TOKYO -- Profit margins at Japanese businesses have long languished below those in other countries, resulting in sluggish stock prices. This could change, though, now that investors are working to raise corporate value by communicating more with management.

     The Nikkei Stock Average rebounded sharply Thursday, buoyed by the previous day's rise in U.S. shares. But as a general trend, investment money is heading toward companies that employ their capital efficiently.

     Astellas Pharma, known for aggressively repurchasing shares, hit a year-to-date high Thursday. The highly profitable Kao marked an all-time high. Without a doubt, investors are gravitating toward companies that efficiently generate profits using money from shareholders and then return a good chunk of these profits to them.

     As attention turns to companies that keep shareholders in mind, Misaki Capital will launch this July a new Japanese-stock investment fund that not only buys and sells stocks, but also engages in dialogue with management to improve corporate value. Plans call for the fund to work with corporate leaders to realize business globalization, improved productivity and other goals.

     Yasunori Nakagami, a longtime business consultant who serves as president of Misaki Capital, expresses alarm over the diminishing presence of Japanese companies in the global market. Over a decade through 2013, Japanese companies had an average return on equity of around 7% -- the lowest among key nations. ROE averages roughly 15% for American companies and 12% for Brazilian businesses, for example.

     Weak profitability is to blame for the low ROE. The net profit margin for corporations in Japan amounted to 4% or so for fiscal 2012, compared with 11% in the U.S. and 9% in Europe. Many Japanese companies still have unprofitable subsidiaries and excess facilities that are dragging down profits.

     This is one reason the Japanese stock market has barely climbed over the past 30 years or so. "To change this situation, efforts need to be made not only by corporations, but also on the investor side," Nakagami argues.

     Signs of change can be seen. Japan's Government Pension Investment Fund, one of the world's largest public pension funds, will start exercising voting rights in companies in its portfolio based on its policies. This move comes as the fund adopts the Japanese version of the U.K. Stewardship Code, which urges shareholders to communicate more with companies.

     Metalworking machinery manufacturer Amada, which has ample cash on hand, has announced plans to distribute all profits to shareholders. The move was likely prompted by its failure to make the JPX-Nikkei Index 400, which includes companies based on ROE and other criteria.

     Shareholders that communicate with management may see their efforts pay off. Tokio Marine Asset Management began investing with a focus on dialogue about two years ago through a partnership with proxy advisory firm Governance for Owners. Since its launch, their fund has enjoyed investment returns beating the benchmark stock index by about 15%. Money from major investors is expected to flow in soon, drawn to the solid performance.

     Management and shareholders have just begun efforts to build a win-win relationship. The outcome is sure to determine the fate of Japanese stocks over the long term.

 

 

 

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