“The record wave of global investors cutting their Japan equity wave testifies that the negative earnings outlook has been acted upon already.”
Has the sell-off gone too far?
Nikko Asset Management’s chief investment officer Hiroki Tsujimura is even more bullish, claiming that rampant cost-cutting programmes will offset any impact a stronger yen might have.
That observation chimes with the summer’s reporting season. Japanese companies, which are no strangers to difficult times, mainly beat analyst estimates in a challenging period by slashing expenses and having manufacturing sites abroad.
Mr Tsujimura and his colleague John Vail reckon cautious management, and further government asset-buying sprees, are not reflected in price-to-earnings ratio, which lag other developed markets and are close to post-Abenomics lows.
Some commentators are uncomfortable endorsing an equity market where the central bank is the biggest whale, adding that this makes shares harder to trade and could crowd out shareholders keen to push for better corporate governance.
But Mr Vail offers a more positive take on the BoJ’s various interventionist actions. “Even though Japan’s economy is not very strong, this should not concern investors greatly,” he says.
“We believe that Abenomics is working reasonably well, especially for corporations, as second quarter pre-tax profit margins (on a four quarter average) remained near historical highs, despite the stronger yen. On an after-tax basis, the improvement is even better due to lower corporate taxes.”
Shaking up boardrooms
Lower corporate taxes are at the heart of Mr Abe’s business-friendly agenda. Slashing one of the developed world’s highest tax rates formed part of his pledge to encourage companies to invest more, hire extra staff and raise wages.
Other measures introduced under his third and final “arrow” included cutting red tape, boosting productivity, getting increasing women into the workforce and improving governance.
The latter strategy, which involves persuading bosses to distribute more capital to shareholders, proved to be particularly popular among foreign investors.
Efforts to transform the corporate Japanese habit of sitting on cash appear to be working, too. Despite reports that many have been dragging their heels over the corporate governance code, a year after the policy was launched listed companies were credited for returning a record proportion of profits to investors.
Encouraging foreign influence in boardrooms might also have played a role in erasing a culture of stinginess and investment in questionable diversification projects.
Research shows that an increasing number of aggressive hedge fund managers are arriving from North America to rapidly shake up how the Japanese do business.
