Japan’s new direction

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Ethan Wu (0:36)

Thank Pushkin.

Japan is the world's third biggest economy, and this year, its stock market, which usually is pretty unremarkable, has showed some really impressive signs of life. It's up 20% on the year, and that rally has been built on signs of really big change happening in corporate Japan. Today on the show, it's crunch time for Japanese markets. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu, here in the New York studio, joined from London by the FT's other biggest Japan fan, Katie Martin.

Katie Martin (1:12)

Hey, Ethan, how are you?

Ethan Wu (1:13)

I'm well, thanks. I love talking about Japan. I feel like it's like a bug that bit me, and I want to talk about it as much as our producers will let us talk about it.

And I feel like you're the same way. You write about this a lot too.

Katie Martin (1:25)

I've been in this business an embarrassingly long time, like writing about markets and talking to people about markets. And I've honestly gone for like literally decades without anyone mentioning Japanese stocks, except to say, never buy Japanese stocks, because they will always mess you up. I know there's a private banker who I talk to quite often, and he says that was like the first piece of advice that anyone gave him when he went to a trading floor was, whatever you do, don't buy Japan.

It will never go your way. It will always let you down.

You know, it's been a terrible market to be in ever since the crash 30 years ago, but now suddenly, I have fun managers cheering my ear off about it all the time. People are looking at Japan, they're already invested in Japan. Suddenly, this is one of the kind of go-to markets. And yeah, it's quite unsettling, honestly.

Ethan Wu (2:14)

Well, let's back up, maybe back to March, April, May, when the rally first started kicking off in earnest. What was the case for Japanese equities back then, Katie, toward the beginning of this year?

Katie Martin (2:25)

The buy case, well, it was a few things. It is partly the weak yen, so that's really good for exporters. People will argue about really how genuinely important this is for the performance of the stock market, but it certainly helps certain types of companies. But it's also about this big focus that has taken root on a government level and on a stock market level around corporate governance and about making companies think differently about actively working to push their share price higher.

This might sound quite strange to Americans, for example. I get this, but it's a big shift for corporate Japan to be told, right, you've got to push your price to book ratio higher, which means, so your price to book ratio is, does your share price indicate that your company is worth more than the sum total of all of your assets? So if you liquidated everything tomorrow, just sold everything that you own as a business, would that be worth more or less than your share price? And what the push has been is to say, you've got to push valuations higher. You've got to push multiples higher. You've got to bring in investors, whether that's by bumping up your dividends, whether it's by a shift in corporate strategy, whether it's by buying back stocks or a combination of all of these things, just do what you can to push your share price higher.

This is like a really big shift in the mindset, honestly.

Ethan Wu (3:48)

Absolutely. It comes down to what model of capitalism is going to exist in Japan long term.

Katie Martin (3:54)

Getting a bit deep and meaningful here, aren't you, Ethan? I mean, come on.

Ethan Wu (3:58)

There's a great piece by the journalist and academics, Stephen Vogel, called Japan's Ambivalent Pursuit of Shareholder Capitalism. That kind of goes through how international finance tried to export a US and maybe UK style shareholder-first capitalist model to Japan. And the Japanese were kind of like, eh? We believe in stakeholder capitalism here in Japan. But that does seem to be changing, Katie, as you mentioned.

There was an initial push in the early 2010s during kind of the Abenomics era, Shinzo Abe's big push to get an official corporate code of conduct inducted and to just change the norms and expectations surrounding how companies are run. That if you make excess profit, you're not just going to put it in the bank and sit on it. You're not going to just buy your rivals slash friends' shares and do nothing with it. You're going to take that cash and return it to the investors that have given you their capital to do business with.