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Is Japan Becoming More Shareholder Friendly?

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Among the popular asset categories in Japan, equities have been on the bright spot, according to Among the popular asset categories in Japan, equities have been on the bright spot, according to Paul Jackson, head of research at Source UK Services Limited UK Services Limited. The firm has an Overweight rating on Japanese equities.

Jackson noted that Japanese equities increased 10% (in yen) since their last asset allocation review in March. He also observed that the dividend distribution in Japan is growing rapidly.

The dividends in Japan were growing at the low single-digit rate in December 2012 when Shinzo Abe was elected as Prime Minister. By the end of 2013, dividends increased at a double-digit rate. Currently, the dividend growth rate is around 15% year-over-year, according Jackson, using Datastream indices. He believes that it not the right time to reduce exposure to Japanese equities.

“Since the acceleration became evident at end-October 2013, dividends have increased 30% while the market is up 40% (the dividend yield has fallen from 1.7% to 1.6%),” said Jackson.

Japan stock buyback reached almost 1 trillion yen in May

A related report from equity strategists at Barclays noted that companies in Japan significantly increased their capital returns to shareholders along with low valuations and steady growth in earnings per share.

Last month, companies in Japan announced almost 1 trillion yen in stock buybacks. The dividend distribution of Japanese companies exceeded the consensus estimates set for the fiscal year ended March 31 by 4.5%. Based on the figures, it appears that Japan is becoming friendly to shareholders.

Weakening yen helps maintain profit growth in Japan

According to Jackson, the growing dividend must have contributed to the 40% gain of stock prices in Japan. He also suggested that the weakening yen helped maintained the profit growth of the country ahead of the Eurozone.

Jackson said, “Japanese stocks were also aided by the rebound from historically low dividend payout ratios. Even if the yen bottoms (as we expect), Abenomics could still help via shareholder-friendly pay-outs. The Eurozone, with already elevated pay-outs, must hope for growth.”

He added that the policies of PM Abe were probably supporting the equities in Japan through a shareholder-friendly approach. He also suggested that profit will again accelerate if the weak yen is helping the economic performance of Japan, which should sustain dividend growth.

“We believe the rise in Japanese equities was, and will continue to be, justified by dividend growth,” said Jackson.

Loeb finds investment opportunities in Japan

Daniel Loeb of Third Point is finding investment opportunities in Japan and he is excited about it. In a previous conference call, he revealed that he recently met with Japanese companies and government officials when he visited the country.

In a letter to investors last month, Loeb said, “Abenomics is working. In 2014, Japan created an index of 400 domestic companies that employed best practices of corporate governance. The jockeying to be part of the index set off conversations about outside directors, transparency, and modernizing investor relations.” According to him, 10% of Third Point’s assets are invested in Japan.

Third Point owns a huge stake in Fanuc, a manufacturer of robots in Japan. The activist investor described Fanuc as the “Apple of Japan” Fanuc created a shareholder relations department and indicated its plan to increase dividends and shares buyback in response to Loeb’s demand.

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