“However, creating value for shareholders had not historically been a top priority. This obviously is in contrast to other developed markets such as the US where for decades the guiding mantra been to maximise shareholder value through share price appreciation,” says Withaar in an interview with The Edge Singapore.
Three decades after the economic bubble burst in the early 1990s, changes are afoot — slowly at first but with a discernible pick-up subsequently. Besides the introduction of the Corporate Governance Code in 2015, the Tokyo Stock Exchange introduced proposals on value creation, addressing low returns on equity and low price-to-book ratios.
And, with rising inflation expectations, more Japanese companies are starting to appreciate that their decades of cash accumulation will no longer be a rational move, given how they will suffer from negative real returns. More of Japan Inc are paying more attention to giving better returns to shareholders.
After years of nudging, the wheels of a reviving stock market began to turn a couple of years back. Last February, the benchmark Nikkei 225 recovered to above the previous peak achieved in 1989.
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There is also a generational shift between the mindset of the business executives who have been calling the shots in the post-bubble decades and the ones taking over. “[The former] had seen that exuberance and what it led to, and that had sort of really institutionalised conservatism throughout corporate Japan,” observes Withaar.
The new cohort of top managers is eager to demonstrate that they are willing to do things differently. According to Withaar, this has led to more active dialogue between shareholders and corporate boards on how to improve returns through higher share buybacks and more generous dividend payouts.
As existing shareholders enjoy improved returns, more investors are drawn in, resulting in a virtuous cycle.
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In addition, many companies are starting to consider divesting stakes in cross-shareholdings and listed subsidiaries or fully acquiring these stakes. Either way, the value thus unlocked should further increase the return of capital to shareholders as well. Of the 3,500 or so companies listed in Japan, around 3,200 of them have some form of cross holdings or another, so there are plenty of such corporate activities to take place.
Naturally, all these means investment opportunities for international asset managers like Withaar, who runs the Pictet Asset Management’s Total Return (TR)-Lotus fund, which was set up in 2022 to capture potential gains from event-driven, special situations across this region. The fund is available to accredited and institutional investors here in Singapore. At any point in time, Withaar has positions in dozens of companies. Besides the fund’s existing AUM, he can tap into further funding from the bank if need be.
“We are involved in a broad range of situations but predominantly focus on companies that are trying to create value through corporate restructuring. We also seek to have exposure to situations where there are significant changes to the regulatory landscape or market structure. Currently, the big focus in this regard is Japan as a result of the significant corporate governance rule changes that have recently come into effect,” says Withaar.
In addition to mature companies with value waiting to be unlocked, Withaar is looking to also invest in so-called emerging companies, which refers to privately held companies enjoying lower valuations than publicly traded ones. “We would generally look for companies that are hungry for capital, that are looking to transition from the private market into public markets,” he adds.
Falling yen, tariffs
The changing mindsets and growing investors’ interest in Japan have helped a buoyant market, but there are challenges. Since the previous market peak last February, Japan has eased by around 10%.
Withaar maintains an optimistic view of Japan. Aside from the stock market, there are positive signs from various quarters of the real economy, such as rising real estate prices, which will presumably help support the markets going forward.
For example, last December, Blackstone made the largest-ever acquisition of a property by a foreigner in Japan. The US asset manager paid JPY400 billion, or about $3.6 billion, to acquire the Tokyo Garden Terrace Kioicho mixed development from conglomerate Seibu Holding, which suggests that many more people are comfortable investing in this market.
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Another positive factor for Japan is its alignment with the US. For example, instead of exporting from Japan, Toyota, the world’s largest car maker, has set up numerous production plants in the US to build cars for the world’s second largest car market.
Nippon Steel, after a lengthy courtship in the face of domestic US political opposition, dropped its US$14.9 billion takeover bid of US Steel. Yet, it remains committed to the US market with promises to take a smaller stake in US Steel instead.
Such moves make Japan a “good partner” and less of a tariff target, which the US has already imposed on close trading partners like Canada and Mexico. Nonetheless, Withaar warns that investors still need to watch what President Donald Trump might do next.
Withaar is also expecting that Japan’s growth could be crimped by the weakening yen. As the yen dropped against other major currencies, earnings in yen for many of the export-geared Japanese companies began appreciating at a rapid rate, which then caused occasional multi-day drops in the Japanese stock market last year. Also, the weakening yen is encouraging more Japanese investors to send their money to foreign markets like the US markets instead of investing locally.
The weakened yen will also deter foreign investment in Japan. “From a long-term foreign investor perspective, why would I invest in Japan when the stocks go up, but then the yen goes down and I make nothing? If you look at the Nikkei in yen terms last year, it had a decent enough year up 19%, but looking in dollar terms, it was a big underperformer up under 7%. So, there’s not really an incentive for an American fund or European fund to invest in Japan if they are concerned about the yen going down as it acts as a big headwind,” he adds.
Soft activism
Such worries aside, there are still enough reasons to like Japan. The growing field of investment opportunities in this market has attracted attention from international institutional investors.
According to Morgan Stanley, activist campaigns have been steadily increasing over time, and Japan is the second-largest market for activist or engagement campaigns. Activist campaigns have been mainly successful, as research by Bank of America has shown. Therefore, activist campaigns are seen to remain at an elevated level for the foreseeable future.
Now, the behaviour of external investors charging into target companies to agitate for change and extract value is by no means a new playbook in the finance world. Withaar prefers a “soft activism” approach, especially so given how foreigners stick out all too easily in this largely homogeneous country. “We don’t want to write an angry letter, go to the press or vote against management unless we absolutely have to. We have before, but generally we don’t want to do that,” he says.
Instead, Withaar believes that working together behind the scenes with the companies and providing insights and suggestions as a shareholder is a more constructive way of driving value for all in the long term.
His style has been deemed palatable by some. Withaar recalls being pleasantly surprised some months back when he had the CEOs of two “very large, old and respected” Japanese companies asking for meetings. “I pinched myself for a minute. Five years or ten years ago, I would never have had such a frank meeting with this level of management. Now they are coming to me and asking me, ‘How do you think we’re doing?’”
For Withaar, the people running Japanese companies today are realising that there are real benefits to partnering with the “right kind of investors” and to have these investors help get their share prices up, as that would obviously help their access to capital and everything else. “This is a momentum that we really like and that we see really benefiting shareholders in the long term,” he says.
