- Japanese equities partially rebounded from their post-1980’s-bubble decline during Shinzo Abe’s tenure as prime minister from late 2012 through late 2020. Expanding corporate profit margins accounted for the bulk of market return.
- From a corporate-governance perspective, there have been clear improvements to Japanese firms’ board practices and gender diversity over the past decade.
- Despite the recent gains, Japanese firms still trail other developed markets in key measures of corporate performance and governance.
As the world mourns former Japanese Prime Minister Shinzo Abe, Japan is living with the legacy of the many political, social and economic initiatives he put in motion. Abe’s aggressive economic policies were geared toward restarting Japan’s stagnant GDP growth and slowing deflationary pressures that were present when he took office in 2012. With his untimely death, it’s natural to ask: What was the impact of “Abenomics” for Japanese firms and global investors?
To help answer that, we focus on the legacy of two initiatives that affected shareholders and could have continued implications for global and EAFE-region investors: firm competitiveness and profitability and corporate governance.
Long story, short: Equity investors benefited
Let’s start with the results, which were quite positive for equity investors. From early 2013 through June of this year, Japanese stocks gained more than 160% in JPY terms (about 70% in USD terms). While that trailed U.S. equities over the same period, it was enough to outpace European equities and reverse their own two-decadelong stupor after the stock bubble of the 1980s.
All of which begs the question, what was behind the revitalization of Japanese equities?
Japanese stocks rebounded after a range-bound two decades
Returns are in gross USD for the MSCI USA, MSCI Europe and MSCI Japan Indexes from December 1990 through June 2022.
We found that expanding profitability, which has doubled since 2013, was the largest contributor to the Japanese equity-market returns, followed by dividends and revenue growth (shown below).
Japanese firms’ profitability led the equity rally
Return decomposition on MSCI USA, MSCI Europe and MSCI Japan Indexes is in USD. Data from December 2012 through June 2022.
Japanese firms that embraced corporate-governance reform outperformed
Japan’s adoption of the Stewardship Code in 2014 and Corporate Governance Code (CG Code) in 2015 has served as a catalyst in pressuring both management and investors to better align Japanese corporate-governance practices with global best practices.
In 2014, and prior to the adoption of the CG Code, there were 54 constituents of the MSCI Japan Index that were assessed as having zero independent directors. Today, all constituents have been assessed as having at least one director who can be considered fully independent of management, and average board independence was just under 50%. Subsequent revisions to the CG Code expanded the push for greater board diversity from the perspective of gender, experience and age.
Average board independence in Japan is 50% today
Weighted average of independent board members and female board members for the MSCI USA, MSCI Europe and MSCI Japan Indexes, as of June 2022.
The effects of these changes can be seen in the outperformance of the MSCI Japan Governance Quality Index compared to the MSCI Japan Index. The MSCI Japan Governance Quality Index is comprised of firms that tend to be of higher financial quality (including those that are more profitable), while assessing firms’ board independence and diversity, ownership and control structure and accounting practices.1
Profitable firms with high standards of corporate governance outperformed the broad market
Returns are gross in USD from January 2010 through June 2022.
From 2010 through June of this year, the index outperformed (turquoise trace above) the broad Japanese market by 10%, suggesting some benefit to holding firms that were aligned with Abe’s corporate-reform agenda.
The positive impact of Abe’s commitment to improving corporate competitiveness and governance in Japan is easily seen, but challenges remain.
For example, his “three arrows” program of monetary easing, fiscal stimulus and structural reforms had some setbacks. The yen’s prolonged depreciation — falling 18% against the U.S. dollar throughout Abe’s tenure and another 15% just this year — has been a persistent detractor for global investors.
Additionally, Japanese corporations continue to trail those in other developed markets in profitability, overall board independence and diversity, and the increased emphasis on transparency and shareholder engagement Abe helped develop has exposed several high-profile corporate scandals. Much has changed, yet the work continues. With the victory of Shinzo Abe’s Liberal Democratic Party following his death, his corporate-reform policies will likely endure.
The authors thank Ric Marshall for his contributions to this post.
1The MSCI Japan Governance Quality Index uses firm profitability, earnings variability and leverage as indicators of financial quality.