Dramatic times in Japan’s capital markets: Jefferies’ Chris Wood

In Japan, the threat of delisting is particularly significant, according to Chris Wood.

The ending of a 30-year-long deflation, the Tokyo Stock Exchange (TSE) putting rigorous listing requirements and market flows diverting from China are all coming together to make for a dramatic change in Japan, according to Jefferies.

“These are dramatic times in Japan’s capital markets,” wrote Chris Wood, Global Head of Equity Strategy at Jefferies, in a report titled 'From Lost Decade to Golden Age: A New Paradigm for Japan Inc'. The Lost Decade is a term used to describe the years between 1991 and 2001, when the country’s economic growth nearly came to a standstill with the central bank hiking rates to counter a real-estate bubble.

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In this latest report, Wood noted the transformation that is happening in the economy.

“Growing evidence that Japan has exited deflation is also combining with growing evidence that long-running efforts to improve corporate governance, initiated with the launch of Abenomics back in late 2012, are reaching a crescendo,” he wrote.

According to him, along with the other factors, the TSE’s intervention “proved decisive”.

The exchange has made the listing requirements—relating to liquidity, corporate governance, profitability and returns—more rigorous, with an aim to boost capital efficiency among Japan’s listed companies.

Companies have to meet these requirements by March 2025 and those who miss the deadline have to disclose action plans and progress, or potentially face delisting.

This threat, of delisting, is particularly significant in a culture that values honour, according to Wood. “This can be seen in the accelerating surge in share buybacks this year, as well as in the fact that major pillars of the Keidanren establishment, from Toyota down, have started to undertake real restructuring,” he wrote, in the report. Keidanren is another name for the Japanese Federation of Economic Organizations, and it was set up after the Second World War to help rebuild the economy.

Wood added, “If change in Japan can often seem painfully slow and incremental by Western standards, once a new consensus has been formed, the resulting change in behaviour can be both durable and dramatic.”

He wrote that there is a hope that added tax breaks will encourage retail investment in stocks, but Wood believes that more needs to be done to make equities look attractive.

“Improved corporate governance and, in particular, higher dividend payouts can only help in that regard,” he wrote, adding that a conviction that deflation has ended will also help.

Wood also said that the real question is whether the country’s domestic institutional investors will finally “reallocate out of yen fixed income into domestic equities”.