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Asia Pacific Equities
Japan stocks count on Abe’s third arrow
From the Financial Times of Tue, 23 Dec 2014 08:51:38 GMT

Wahei Takeda likes what he sees of “Abenomics”. The 81-year-old biscuits baron, long known as Japan’s Warren Buffett, expects the Nikkei 225 average to break the 21,000 level in 2015 — up about a fifth from today’s levels — propelled by a series of measures designed to enhance the long-term appeal of stocks as investments.

The self-styled Sage of Nagoya salutes the JPX-Nikkei 400, a new index showcasing profitable companies with better-than-average governance structures. He likes the new stewardship code for institutional investors, finalised in February, and an emerging code of conduct for companies which should be in place by June next year. Higher corporate profits should mean higher taxes, which is “vital” for restoring Japan’s fiscal health, says the man who made his fortune selling egg-shaped snacks for toddlers.

Mr Takeda also welcomes the arrival of Nippon Individual Savings Accounts, or Nisas, introduced this year to tempt cash-clinging households into equities. After the excitement of the past couple of years, when stocks were pushed up by foreign investors lured by the prospect of unlimited monetary stimulus from the central bank, a new phase is under way, he says. “My hope is that a generation of wise investors will be nurtured.”

Other bulls argue that the Japanese market is taking on a new character, two years on from the return of prime minister, Shinzo Abe. In the first phase, market momentum depended on the movements of big macro hedge funds essentially playing a currency game; the weaker the yen, the greater the value of companies’ profits earned abroad. In the second, they say, domestic market participants will play a more important role, responding to the government’s determination to revitalise one of the world’s biggest equity markets, recently knocked into third place by a resurgent China.

Many hope those efforts will be enhanced by Mr Abe’s renewed mandate, following a comfortable victory for the ruling Liberal Democratic Party in this month’s snap election. Already, the various governance initiatives are “changing the way companies think and the way they behave”, says Howard Smith, Tokyo-based managing director at Indus Capital Advisors, an Asia-focused hedge fund. “That can only be a good thing.”

Trust banks — which act on behalf of Japan’s pension funds — replaced foreign investors this year as the biggest net buyers of stocks, many of them taking their lead from a landmark portfolio reshuffle at the Y131tn ($1.1tn) Government Pension Investment Fund.

Trust banks made Y230bn of net stock purchases in November — the seventh month in a row, and all the more “impressive” as it came amid a rising market, says Yujiro Goto, a currency analyst at Nomura. In the past, he notes, pension funds have tended to be contrarians, buying amid periodic bouts of stock-dumping by foreign investors.

More determined buying by domestic institutions is likely next year, as the mutual aid systems for public-service personnel and local government officials look to emulate the GPIF, to some extent, ahead of their integration in October. That is another Y27tn or so to be reshuffled, implying net buying of about Y2.6tn of domestic stocks, on Mizuho estimates.

The corporate governance code, too, could be a longer-term prop for prices.

The preamble to the draft code, published by the Financial Services Agency for comments this month, states that it and the stewardship code — to which 175 institutions had signed up by the end of November — are “the twin axles of a car”. Among a long list of items, companies are required to appoint “multiple” independent non-executive directors, separate management functions from oversight functions where possible, and to clarify directors’ obligations to shareholders as well as other stakeholders — all on a “comply or explain” basis.

Some fear that Keidanren, the still-powerful lobby group representing Japan’s biggest companies, will try to soften some of the code’s provisions between now and June, which is when the annual shareholder meeting season begins. But at a time when Keidanren is urging the government to cut corporate taxes, it will be wary of overplaying its hand, says Nicholas Benes, a Tokyo-based governance expert who took a lead role in proposing the concept of the code and items to include in it.

For now, he says, “we finally have a real, robust ‘third arrow’ that will change the status quo on a previously taboo topic”.

The government’s decision to put the FSA in charge of the code, rather than the ministry of economy, trade and industry, means the “monkey of accountability is clearly on their back”, he adds. “They have to do a good job because they are the bureaucrats that have responsibility for making a better capital market and protecting investors.”

Additional reporting by Kana Inagaki 

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