Japan has got what it takes to emerge a winner from the global 2020 great lockdown recession. In fact, there is growing evidence that the resilience and persistence practiced during Japan’s “lost decades” will now pay off and provide high returns — not just for investors, but also for society’s future prosperity.
To start, let’s follow the money. Japan’s listed companies started this year with the biggest cash reserves ever recorded anywhere in recorded history. Collectively the companies listed on the Tokyo Stock Exchange reported slightly more than $6.5 trillion of cash and short-term securities on their balance sheet at the end of 2019, as I aggregate the data. This is up from barely $3 trillion eight years ago and, compared to American companies, the cash “war chest” is almost twice as large.
Also, Japan’s cash reserves are broadly spread out across all sectors, while America’s are highly concentrated, with about one third of U.S. corporate cash reserves lorded over by the few well-known tech oligopolies. Japan Inc. has ample firepower to invest in future growth. But will it?
Here it is important to set the record straight. Over the past decades, Japan Inc. stood accused of seemingly irrational hoarding of money. Everybody tried to get their hands on money: Prime Minister Shinzo Abe tried for years to get corporate leaders to invest in higher wages. Technology companies urged more aggressive upgrades of factory machinery or IT backbones. Marketing companies tried to sell glitzier and smoother advertising campaigns. Investment bankers tried to broker more aggressive M&A activity. Shareholder activists lobbied for higher dividends and greater share buybacks.
You don’t have to be a hard-nosed capitalist to realize that the corporate obsession with cash hoarding comes with a cost for the overall economy. To wit: Approximately 54 percent of listed companies boast a cash pile that is worth more than their shareholders equity, but earns a return of zero. Clearly the point of having a CEO and executive team is to find opportunities to earn more than zero, isn't it?
Yet in typical Japanese fashion, the battles with Abe or with aggressive shareholders actually resulted in a wonderful compromise. All stakeholders got a little bit.
Specifically, for labor, after almost two decades of declines, nominal wages bottomed in 2012, with workers' compensation up ¥34 trillion — or approximately 5 percent of GDP between 2013 and 2019, and now back above the bubble economy peak recorded in 1992. For capital, not only did corporate profits climbed toward a new historic high in 2019, but the payout ratio — dividends and share buybacks as a percentage of net profits (i.e., what investors get of the profits) — rose from approximately 35 percent in 2012 to just over 60 percent last year.
All this happened while cash balances also rose sharply, from just about $3 trillion in 2012 to slightly more than $6.5 trillion by December 2019.
In other words, all stakeholders won. Japan Inc. kept having its sushi and eating it at the same time. This ability to satisfy multi-stakeholders is exactly what makes Japan great and is a definite positive aspect of “Japanification” that other capitalist countries should aspire to embrace. It put Japan in a very strong position, not just for corporations but also for society as a whole, as evidenced in the relatively moderate gap in wealth and income distribution, very high social mobility, and a general sense of economic fairness and socio-economic justice.
So far so good. Japan is in an excellent position to use the current global crisis as an opportunity. I expect companies will not abandon their success model of serving all stakeholders, be they customers, employees, bankers or shareholders. Unlike many global competitors who are being forced by the crisis to cut relationships, to sell businesses, or to seek nationalization or public funds, Japan Inc. will stay unfettered by government shackles and can focus on investing in new growth opportunities. Because the cash war chest is so enormous, both corporate independence and all corporate stakeholders will keep on winning.
Specifically, I expect several major developments. First, dividends are unlikely to be cut significantly. The Japanese stock market will become the “dividend king” of major global markets. Already, Japan’s dividend yield is higher than Wall Street, about 2.5 percent versus 1.9 percent. If I am right, boasting the advanced world’s highest dividend yield may well become a catalyst for a more pronounced shift in Japanese household savings into the local stock market.
Second, there is poised to be an accelerated boom in domestic mergers and acquisitions. Japanese industry is extremely fragmented. The top four companies control less than 15 percent of their industries' total revenues — in the United States the concentration of “winners” is much higher, around 38 percent.
The crisis has almost certainly triggered a greater openness of management to consider mergers and consolidation. A particular focus should be Japan’s financial services companies — regional banks, mid-tier securities and insurance companies. Another focus should be the machinery and machine tool companies as well as the overly fragmented food, pharmaceutical and energy sectors. It would be good policy to offer tax incentives to speed up long-overdue industrial consolidation.
Third, I expect a surge in overseas acquisitions and new joint ventures. Here, the car and car-parts industry is very much in play, with its open ambition to expand and grow its global footprint. So too are Japanese mega-banks, big insurers, and chemical, pharmaceutical and base-materials companies.
Fourth, corporate sponsored angel- and venture-capital investment in a new generation of innovators and entrepreneurs is poised to gather momentum. While the leaders of corporate Japan are proud to have defended themselves and their companies against excessive “Americanization,” they have enough of an open mind to understand that nurturing start-ups and independent entrepreneurs will be key to Japan’s future success and prosperity.
All said, watch out for Japan Inc. Pride and confidence in Japan-style capitalism and Japan-style leadership have grown during this crisis and, as a "new normal" is being crafted, I am excited about a new wave of inspired growth strategies here in the domestic market, as well a the next round of bold international investments by Japan.
Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.
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