Return on equity, which measures how efficient businesses generate earnings from shareholder capital, is considerable lower in Japan than in the US, UK, Australia and Europe.
If anything, these activist investors are definitely capable of dictating how funds can be better spent, whether it is through smarter investment, mergers and acquisitions, share buybacks or generous dividends.
Dividends are becoming the norm
This potential has become a hot topic in income investing circles. “Japan is home to many profitable companies that have significant levels of cash on their balance sheets, but which have been relatively poor historically at distributing profits to shareholders,” says Ben Lofthouse, portfolio manager of Henderson’s global equity team.
“Dividends from Japanese companies grew rapidly in 2015 in local currency terms. And the recent strengthening of the Japanese yen – which additionally boosts returns for overseas holders of Japanese assets – has provided a further fillip.”
Talk of rapidly growing dividends will be well-received by most investors. But, as Mr Lofthouse correctly adds, these figures are flattered by weak comparatives, meaning that Japan’s fast rising payouts are still nowhere near the heights of the more established income-paying nations.
"The market only yields around 2 per cent at present, and with only 10.7 per cent of the Japanese market expected to yield more than 3 per cent looking ahead 12 months, it is proving challenging to find companies with an attractive dividend yield,” he says.
If that wasn’t enough, Mr Lofthouse also warns that the Japanese custom of fixing payout ratios to percentage of earnings can make these comparatively small dividends volatile.
For those reasons his income trust currently has a limit exposure to the country, although he expects that to change once the reforms take hold and a dividend culture becomes more embedded.
Schroders fund manager Nathan Gibbs is similarly keeping a careful eye on the nation’s increasingly shareholder-friendly culture, even if he, too, remains cautious at this stage.
“Higher dividends and share buybacks are part of a trend towards better shareholder returns in Japan,” Mr Gibbs says.
“Having said that, current conditions are particularly favourable as corporate Japan continues to generate high levels of cash, allowing many companies to increase shareholder pay-outs while still adding to cash on their balance sheets.
"To truly judge whether the attitude to shareholders has changed long-term, we will need to see how companies react in a more difficult period, or in a recessionary environment.”
Small-caps fall under the radar
Another area of the Japanese stock market that’s attracting Mr Gibbs’ attention is the small-cap space. Smaller companies in the land of the rising sun have enjoyed a revival in recent times, as most sell their products domestically, and are subsequently less impacted by the strengthening yen and turbulence in overseas markets.
