Abe’s ‘arrows’ hit home as corporates begin paying out

Japanese firms have long been known for hoarding cash than for paying it as dividends to investors but, under prime minister Shinzo Abe’s ‘three arrows’ of reform, corporates have begun improving payouts. 

Naoki Kamiyama, chief strategist at Nikko Asset Management, says: “One of the main purposes of the reforms has been to encourage ‘cash-rich’ Japanese firms to stop hoarding cash and funnel some of it back into the economy. 

“The tendency to hoard cash is particularly high among small to mid-sized enterprises. This behaviour stems from the legacy of Japan’s credit crunch in the late 1990s, when senior management found themselves cut off from bank lending.”

But he points out: “Clearly, some of these cash-rich companies are changing their attitudes towards shareholders. As evidence of this growing shift in corporate behaviour and as a result of the increasing pressure on corporate governance from the government and institutional investors to improve returns on equity, the past few years have seen a marked increase in share buybacks and dividend payouts.”

He adds that in Japan’s fiscal year 2015, both dividends and buybacks rose to record levels, with Japanese companies paying out almost ¥10trn (£77bn) in dividends and large firms announcing significant buyback programmes.

There are signs the outlook for Asian income is improving too, enticing investors back to a region they have been known to shun in favour of income from developed markets such as the UK and the US.

Richard Turnill, BlackRock’s global chief investment strategist, believes emerging Asia in particular is at “a turning point”.

“Reflation across emerging Asia is reflected in improving corporate profits. The shift away from the steep earnings downgrades of years past is evident. Emerging Asian currencies have also stabilised this year, and the region has relatively high credit ratings among emerging markets. Strong macro fundamentals and demographics support the region’s improved economic outlook.”

He continues: “Investors are tiptoeing back into the region: Foreigners have bought a net $13bn (£10bn) of regional bonds this year and appear to be returning to equities, EPFR Global data shows. They likely have room to increase allocations – $71bn has left Asia ex-Japan bonds and stocks since the mid-2013 ‘taper tantrum’ set off by the Federal Reserve signalling an end to bond purchases.”

According to the Henderson Global Dividend Index, in the second quarter of this year Asia Pacific ex-Japan dividends rose 12.2 per cent on a headline basis to $36.9bn. Meanwhile in Japan, dividend growth slowed sharply over the same period, the index reports. Headline growth was 28.8 per cent, yielding total payouts of $30.8bn, which was attributed to the soaring yen.

In spite of a slowdown in payouts from Japanese corporates, the general picture in the country and across Asia is still one of an improving dividend culture, which can only be encouraging for income-seeking investors.  

Ellie Duncan is deputy features editor at Investment Adviser