How to finish Japan’s business revolution
Shareholder capitalism has had a difficult decade. Large companies around the world have been loaded with social, environmental and national-security goals that are outside their usual profit-making remit, often by governments. Corporate Japan, by contrast, has become far friendlier to shareholders of listed firms. Governance reforms that began after Abe Shinzo became prime minister in 2012 have chipped away at stuffy and value-destroying practices long associated with Japan Inc. The result has been a burst of confidence in Japan’s hitherto-stagnant economy.
The fruits of reform have been tasty. Mergers and investor activism have surged. Share buy-backs hit a record level in 2023, and Japanese firms have already pledged to repurchase over ¥12trn ($85bn) in their stock in 2024, up 25% on the total for all of last year. Foreign investors have noticed. In the year to August they snapped up ¥4.7trn ($33bn) in Japanese stocks. Warren Buffett, a storied investor, has bought stakes in cheaply valued Japanese conglomerates.
For all the success, however, there is still huge room for improvement—particularly when it comes to deploying capital efficiently. The trouble is that Japan’s leaders are acting as if the job were finished. Corporate-governance reform has increasingly been delegated to bureaucrats and is no longer a priority at the highest levels of politics.
The best evidence that reform is incomplete is Japan Inc’s woeful valuations. The price-to-book ratios of listed companies, a measure of their value relative to the worth of their assets, is a mere 1.5. By contrast, American companies are worth five times as much as the assets they hold. Japan’s non-financial firms now hold ¥372trn ($2.6trn) in cash and bank deposits, a figure that has risen by 82% in nominal terms since the end of 2012, suggesting that too many executives are resting on their laurels.
Fortunately, some low-hanging fruit remains to be picked. Nicholas Benes, a former lawyer and one of the architects of the recent reforms, has proposed several changes. Training new corporate directors in financial and legal skills would boost their performance, at minimal cost to companies. Requiring official documents to be machine-readable would make it easier for analysts and investors to compare companies, and for foreign investors to translate those documents into their own languages.
More controversial changes are needed, too. Popular Japanese firms might be sold to overseas buyers who could manage them more effectively. Alimentation Couche-Tard, a Canadian retail giant, has been trying to buy Seven & i Holdings, which owns the 7-Eleven convenience-store brand. Seven & i has rejected Couche-Tard’s first offer of $38.5bn. For Japan to succeed it is important that such deals are feasible.
Other firms will conclude that less productive investments in Japan itself should be abandoned, which means that workers will be laid off. Toshiba and Omron, two Japanese electronics firms, have already announced thousands of lay-offs collectively this year. Managing this change—and explaining its necessity to the public—requires political leadership. Unfortunately Japan’s politicians have little zeal for further reforms.
No hiding
The impetus for change today comes from the Tokyo Stock Exchange, which is pressing listed firms to explain how they are planning to raise their valuations. Pressure also comes from bureaucrats at the Financial Services Agency and Ministry of Economy, Trade and Industry, which have progressively raised governance requirements for companies and institutional investors alike. But prospective candidates for the leadership of Japan’s Liberal Democratic Party—which governs the country, and has done for all but a few years in its post-war history—have barely discussed corporate-governance reform.
If Japan’s politicians cannot recapture some of the reformist zeal of the Abe years, there is little hope for even more difficult reforms, such as making Japan’s rigid labour market more flexible. And unless Japanese companies deploy capital more efficiently, the country will struggle to cope with the challenges it is facing. Japan is the oldest large nation in the world, with 30% of its people aged 65 and over. Security threats from an increasingly bellicose Chinese government are rising. Japan hiked its defence spending by 27% last year, and is increasing it by around 17% this year. Strengthening the economy to help pay for all this is crucial. A matter of such importance and urgency should not be left to technocrats alone.
