Nikkei Tops 40,000: Staying There May Hinge On This $7 Billion Share Buyback
As global capital rediscovers Japan, it stands to reason that battle-tested financiers will require regular doses of evidence that the nation’s corporate governance renaissance is real.
It’s not personal. It’s just that, as with Charlie Brown, Lucy and the football, this isn’t investors’ first brush with things-are-different-this-time chatter surrounding Asia’s second-biggest economy.
Granted, efforts over the last decade to increase returns on equity and give shareholders a louder voice are working, pushing the Nikkei 225 Stock Average above 40,000 for the first time. Still, 2024 will likely be a trust-but-verify year.
In this context, the effort by U.S. activist fund Elliott Investment Management to prod group Mitsui Fudosan, Japan’s biggest property group, to announce a nearly $7 billion share buyback is as good as any reality check on which to keep an eye.
Earlier this month, the Financial Times was first to report that the firm had taken a more than 2% stake in Mitsui Fudosan. Elliott is urging the developer to reduce its interest in Oriental Land, which operates Tokyo Disney Resort.
This push is worth tracking for two reasons. One, because the 82-year-old Mitsui Fudosan is a Japan Inc. icon that checks many boxes in terms of why Japan is returning to favor.
As Jesper Koll, expert director at Monex Group, told CNBC: “The pressure on corporate Japan is now relentless—lazy balance sheets will no longer be tolerated. Even previously untouchable elite companies—Mitsui Fudosan is the undisputed leader in both local and global Japan-led real estate development—are now targeted.”
Two, Elliott has proven to have a knack for settling on prescient targets for change. Twelve months ago, the firm that Paul Singer founded managed to cajole Dai Nippon Printing Co. to execute the largest share buyback in its 147-year history.
Dai Nippon was a savvy choice by the Florida-based investment firm. Despite its long history, it’s hardly a well-known name globally. But Dai Nippon makes for a great microcosm of why global capital is racing Japan’s way. The company is cash-rich, quietly holds a commanding presence in global supply chains and its stock tends to trade well below book value.
For example, Dai Nippon enjoys a sizable global share of components required to make smartphones, electric vehicles, semiconductors and other vital technology. On any list of underappreciated-but-promising Japanese stocks, Dai Nippon deserves a place near the top.
All of which makes Elliott’s focus on Mitsui Fudosan so interesting.
Of course, investors can debate whether the sell-down of shares in Oriental Land that Elliott craves is the best course of action. Might Mitsui Fudosan decide instead to use the proceeds from its 5.4% stake in the developer to invest more aggressively in future growth projects?
Whatever happens, the pressure Elliott is exerting—and the apparent lack of pushback by Mitsui Fudosan—is a clear sign that Japan is a different place than it was in 2014.
That was the year Prime Minister Fumio Kishida’s Liberal Democratic Party finally got serious about raising Japan Inc.’s financial game. It began imposing a U.K.-inspired stewardship code to prod companies to increase return on capital, end old-economy cross-shareholdings arrangements with friendly business groups and give shareholders a louder voice.
A decade on, these upgrades are finally gaining traction. The clearest evidence is the Nikkei surging past its 1989 “bubble economy” highs. This is helping replace Tokyo’s status as a cautionary tale with a hot-investment-destination ethos that may be just getting started.
Can the rally in Nikkei, up more than 46% in the last 12 months, continue? Only time will tell. But how this bull run proceeds will have much to do with how well Kishida’s party plays its cards.
Sadly, the deck isn’t might not be as hot as many global investors scrambling this way think. The problem is that the LDP’s success in pulling corporate Japan out of the 1980s hasn’t been matched elsewhere in Asia’s second-biggest economy.
The background here is that in December 2012, when the LDP returned to power, it did so with bold talk of structural-reform shock therapy to come. Mostly, though, that meant the Bank of Japan supersizing its quantitative easing program and weakening the yen 30%.
Exports boomed and corporate profits swelled. But then-Prime Minister Shinzo Abe quickly shelved plans to cut bureaucracy, internationalize labor practices, rekindle innovation, increase productivity