It is fair to say that the last three decades have been tumultuous for Japan.
The Heisei era began with the jarring transition from the post-war growth period to the bursting of the asset price bubble in the early 90s.
The country has endured a prolonged period of economic stagnation along with the more acute shocks of the Great Hanshin Earthquake (Kobe) of 1995, the Global Financial Crisis in 2008, and the Great East Japan Earthquake and tsunami in 2011.
In spite of the surrounding turmoil, success as a portfolio manager still means being able to identify investment opportunities and beat the markets consistently over the long term.
Compared to 30 years ago, portfolio managers are today flooded with information, while facing a shifting regulatory framework and a chorus of experts constantly informing them of the `right way` to invest.
My ‘right way’ to invest is to thoroughly understand the dynamics that drive the Japanese market and its companies through painstaking fundamental research. There are no short cuts.
We believe equity markets can only be described as partially efficient over the long run, with inefficiencies in the short term that active investment managers are able to exploit.
Japanese companies' focus on profits
Prevailing opinion about the role of corporations has progressed since the 1970s when the late Nobel Laureate Milton Friedman stated that a publicly traded company’s only social responsibility is to increase profits and maximise shareholder value.
In Western markets, there has been a transformation in collective attitudes towards capitalism and the responsibilities of publicly traded companies.
The global financial crisis in 2008 was a watershed moment, and the coronavirus pandemic could be another one. Maximising profits at all costs is no longer enough.
Japan has been an outlier, where corporate governance has historically revolved around banks.
Japanese corporations typically had fewer sources of financing outside of the banking system, and so it was common to build long-term relationships with their main banks. Corporations were more dependent on bank financing, leaving many to focus on the priorities of their lenders rather than their shareholders.
Alongside this dependence on bank financing, a unique system of cross- shareholdings also evolved in Japan, whereby interlocking share ownership between Japanese companies effectively blocked hostile takeovers.
Cross shareholding had become a longstanding practice and allowed companies to ignore outside shareholders’ interests.
The end result was a lack of transparency and accountability from Japanese companies.
With Japan’s closer integration into global capital markets since the “Big Bang” financial liberalisation reforms began in 1996, the influence of banks has waned over the decades.