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Measuring the Sustainability of Abenomics

categories: ESG Products & Services, Responsible Investing, Asset Owners, Hedge Funds, Tokyo, Japan, Research Paper, Osaka, Japan, Nagoya, Japan, Asset Managers (Quant or Fundamental), WATANABE Kenji, TAKABA Minako, SHIBANO Yukie, OH HART Diane, general

Are Improved Returns for Japanese Companies Smoke and Mirrors?

Following decades of recession and slow growth, Japan’s Prime Minister Shinzo Abe introduced a revitalization plan – dubbed Abenomics – in 2012 to address the key barriers of economic growth. In particular, the third “arrow” of Abenomics, the growth strategy, focused on a series of government‐driven initiatives impacting corporations and capital markets. Among them was the establishment of Japan’s Stewardship Code and Corporate Governance Code. Implementation of these codes, also called Two Wheels, focused greater attention among Japanese companies and investors on corporate earnings capabilities. Constituents of the MSCI Japan Index as of August 16, 2016 showed return on equity (ROE) growth of 13% compound annual growth rate (CAGR) between FY2012 and FY20151. However, questions remain as to whether the positive trends in earnings growth can continue, and whether Japanese companies have fundamentally changed their practices to accelerate future growth.

MSCI ESG Research analyzed constituents of the MSCI Japan Index as of August 16, 2016 for trends in corporate governance, human capital, and innovation. We found that while companies significantly improved their performance over key parameters, 2 in aggregate, Japanese companies still had a large gap to make up in order to match global peers in governance oversight and in human capital capacity. An intense competitive landscape has also raised the bar for Japan to keep up with the pace of innovation among global firms.

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Measuring the Sustainability of Abenomics - Japan Report 2016.pdf