Pictet: Japan steht am Scheideweg

Japanese shares have held near a six-year high after Prime Minister Shinzo Abe called a snap general election and delayed a sales tax hike. The market has rallied significantly in the past two weeks after the Bank of Japan expanded its monetary stimulus programme and the GPIF public pension fund announced a bigger-than-expected reallocation of funds from bonds to domestic stocks. Sam Perry, senior investment manager of Japanese equities, explains how the latest policy developments will accelerate efforts to improve the corporate governance of Japanese firms and spur them to spend the cash they have accumulated over the past two decades.

We think the latest policy moves, especially those of the BOJ and GPIF will help speed up structural changes that have begun to take root in corporate Japan over the last couple of years.

For more than two decades, Japanese firms have been paying down debt and hoarding cash, a process that was intrinsically deflationary.

But over the past several years, their cash hoarding has stopped and there is growing evidence that some of them have started to put their cash piles to work. Net cash levels among Japanese companies are starting to decline gradually after peaking at 30 per cent of gross domestic product in 2012.One of the drivers for this change in behaviour is the renewed push led by Abe to improve return on equity (RoE) in Japan. The RoE among Japanese companies in the TOPIX index stands at 8.4 per cent, only just over half that of firms in the S&P 500 index.

RoE, which measures the ratio of net income to shareholders’ equity, is affected by three elements – profit margin, asset turnover and financial leverage. While margins have improved and asset turnover remains strong, corporate Japan’s very low or non-existent leverage helps explain much of the RoE gap.

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