As Japan finds itself in the midst of political and economic transformation, the recent resignation of Prime Minister Fumio Kishida has sent ripples through both domestic and international markets. The country, already grappling with a recession and the challenges of an aging population, is now at a pivotal moment in determining its next steps. The departure of Kishida, who leaves behind record-low approval ratings and a stagnant economy, opens the door for a new leader to potentially usher in a new era of political and business reform. At the same time, Japan’s corporate world is experiencing its own revolution, marked by increased shareholder engagement and a rethinking of old practices.
Economic Shifts and the Yen's Role
On August 5, 2024, global markets faced a significant selloff, driven by multiple factors, including premature concerns about a U.S. slowdown and fears of an AI bubble. However, one of the key contributors to this turmoil was the rising value of the yen, spurred by the Bank of Japan’s second interest rate hike this year. Investors, who had grown accustomed to the yen’s stability in carry trades, were forced to reconsider its future role in global finance.
As the yen gained strength, questions arose not only among international investors but also among Japanese business owners about the currency's positioning in the global economy. Historically a safe haven in times of uncertainty, the yen's newfound volatility has left many reassessing their strategies.
At home, the challenges are just as stark. Japan’s economy, long plagued by a low birthrate and an aging workforce, continues to struggle. Despite the economic reforms introduced under the late Shinzo Abe's "Abenomics," inflation never reached the desired 2% mark, and GDP growth fell short of expectations. Japan's shrinking workforce remains a critical issue, although some experts predict that increased productivity and long-term GDP growth may be on the horizon.
The Business Revolution: Shareholders in the Driver’s Seat
While Japan’s economy faces challenges, its business sector is undergoing significant transformation. Tokyo-listed companies have increasingly embraced shareholder capitalism, breaking away from some of the antiquated practices that once defined "Japan Inc." Governance reforms that began under Abe’s leadership in 2012 have borne fruit, resulting in a surge in mergers, share buybacks, and foreign investments. In 2023, Japanese firms repurchased a record ¥12 trillion ($85 billion) of stock, and 2024 is set to surpass that figure by 25%.
This newfound focus on shareholders has not gone unnoticed by international investors. Warren Buffett, for instance, has taken a keen interest in Japan’s undervalued conglomerates, capitalizing on the opportunity to invest in companies with significant growth potential. Yet, despite these reforms, Japan Inc.’s overall value remains far below its American counterparts, as evidenced by a low price-to-book ratio of 1.5 compared to 5.0 in the U.S. For all the progress made, Japan’s business leaders know the journey is far from complete.
A Call for Further Reform
While corporate governance reforms have led to improvements, many experts argue that Japan still has significant work to do. Nicholas Benes, one of the architects behind these reforms, advocates for further changes, such as training new corporate directors in financial and legal skills. Additionally, making corporate documents machine-readable could streamline processes for analysts and investors, especially foreign ones, making it easier to compare companies.
However, more controversial measures are needed if Japan is to fully unleash its economic potential. International acquisitions, such as Canadian retail giant Alimentation Couche-Tard’s attempt to buy Seven & i Holdings (owners of 7-Eleven), are still met with resistance. Japan’s ability to embrace such deals will be crucial to its long-term success. Additionally, more Japanese firms may need to offload less productive investments, a move that could lead to layoffs, such as those already announced by Toshiba and Omron.
Despite these challenges, Japan’s stock market reforms continue to gather steam, driven by the Tokyo Stock Exchange and key bureaucrats in Japan’s Financial Services Agency and Ministry of Economy, Trade, and Industry. These institutions have increased governance requirements for companies, demanding higher levels of transparency and accountability.
Political Leadership and the Future of Business
As Japan looks to elect its next prime minister, there is a growing realization that political leadership will be key to sustaining the country’s economic momentum. Many of the candidates for the leadership of Japan’s Liberal Democratic Party (LDP) have not prioritized corporate-governance reform, raising concerns that the current pace of change could slow. Experts agree that more difficult reforms, including making Japan’s labor market more flexible, will be necessary to maintain progress.
Whoever takes the reins will need to address not only Japan’s economic future but also its security concerns. Japan has already increased defense spending significantly, a response to rising tensions with China. However, a strong economy will be crucial to funding these defense efforts and ensuring Japan’s role as a key player in global supply chains.
A Country at a Crossroads
Japan stands at a critical juncture. The resignation of Kishida and the ongoing business reforms signal that the country is in a state of transition. While the global market adjusts to the yen’s volatility and investors reassess their strategies, Japan’s business world is becoming more shareholder-friendly. Still, much remains to be done.
The next prime minister will inherit both challenges and opportunities. If Japan’s leaders can rekindle the reformist zeal of the Abe years, the country may yet overcome its demographic challenges, strengthen its economy, and continue to play a pivotal role on the global stage. Whether this will happen depends on the decisions made in the coming months—both by business leaders and politicians.
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