Japan Securities Summit｜Nikkei Asia Partner content

1. Welcoming Remarks

U.S.-Japan cooperation is essential to global stability and prosperity

Today’s summit comes at an important time as both the U.S. and Japan navigate a changing global economy and seek to deepen future collaboration. The role of our countries as key investors in one another’s economies cannot be overstated. Japanese firms continue to enhance their footprint in the U.S. capital markets business, and two-way portfolio transactions and securities between the U.S. and Japan totaled $1.6 trillion in 2023 after more than doubling over the last decade. The longstanding economic and strategic relationship and friendship between the U.S. and Japan is essential to long-term global stability and prosperity. Today’s summit is an opportunity to exchange lessons learned and support effective and resilient capital markets.

2. Opening Remarks

With inflation overcome, a shift from savings to investment

The Japanese economy has firmly overcome the long-standing issue of deflation. Japanese corporate behavior has been evolving with a greater emphasis on capital costs and profitability. On the investor side, the expansion of NISA, a tax exemption program for small investments, has steadily promoted the shift from savings to investment, significantly broadening the investor base.

From a global perspective, however, ongoing geopolitical tensions and other factors seem to be leading the world into an era of further uncertainty. In this context, Japan offers attractive investment opportunities to overseas investors, combining social stability with the flexibility to change.

3. Guest Speech

Realizing a growth-oriented economy through investment and innovation

Last year, Japan’s GDP, corporate earnings, and domestic investment recorded their highest levels in history. Stock prices also hit a 34-year high. A growth-oriented economy driven by wage increases and investment will ensure that these trends continue. To achieve this, it is critical to actively expand domestic investment.

The public and private sectors must work together if we are to achieve our ambitious goal of doubling domestic investment to ¥200 trillion by FY 2040. We will enhance science, technology and innovation, promote domestic investment in AI and semiconductors, and develop frontier fields such as space and the oceans while enhancing support for startups.

We will also accelerate our ongoing initiative for “Promoting Japan as a Leading Asset Management Center”. It is my hope that this initiative will further strengthen investment flows and contribute to the development of global financial markets and the economy, leading to a brighter future.

4. Lead Speech I

Bold initiatives help ensure a positive trajectory for Japan

Positive trends continue for the Japanese economy, with corporate profits and wage growth at historical highs and prospects to overcome deflation looming. The initiative to stimulate Japan’s investment power and to promote Japan as a leading asset management center have helped drive this trend by encouraging a move from savings to investment.

For households, NISA and iDeCo reform, as well as strong push for financial education, have played a key role to shift household deposits to investment. For corporates, an acceleration of corporate governance reform which aims for more efficient business management has been well received by investors. To optimize returns from investment, we are actively inviting new entrants to the asset management sector, including from overseas, and engaging with asset owners, who have an important role to encourage asset managers in doing a better job.

To dispel the negative perception towards Japan in the longer term, I would argue that we have managed demographics well. The total labor force has increased due to rising numbers of foreign workers and greater participation by women and the elderly. Furthermore, bold increase of family-related expenditures coupled with active use of AI offers promise for alleviating demographic challenges. Japan’s comprehensive approach with decisive actions will make it an increasingly desirable destination for investors.

5. Panel Discussion I

Addressing economic challenges in Japan: prospects, risks and opportunities

Laurent Depus, Mitsumaru Kumagai, Alicia Ogawa, Matthew Mohlenkamp

Pointing to Japan’s shift to a growth-oriented economy supported by a virtuous cycle of wage hikes and capital investment, Mitsumaru Kumagai revealed himself to be an unapologetic Japan bull straight out of the gate. “The Japanese economy is at a historical turning point,” he declared.

A decade has now passed since the Abe government brought in a set of reforms - the stewardship code, corporate governance code and NISA investment accounts - designed to drive cash off corporate balance sheets and into the economy. “The corporate governance code imposed a vast number of changes onto Japanese CEOs. They deserve credit for checking all the boxes,” said Alicia Ogawa.

Box-checking, however, is not enough. Because the Japanese corporate governance code is so long, Ogawa noted, some compliance efforts have been more about form than substance. Independent directors make up a third of the board for 95% of Prime-listed companies on the Tokyo Stock Exchange - but only 40% of those directors have business experience. There are more women external directors - but it tends to be the same women juggling multiple directorships. Boards meet frequently - but these meetings are short and superficial by international standards.

Nonetheless, Ogawa thinks now is a “fabulous” moment to invest in Japan. The unwinding of defensive cross-shareholdings has exposed Japanese firms to the voices of real investors, and firms have the option to unlock value by streamlining their over-diversified operations and taking advantage of Japan’s increased workforce liquidity. “We’re in a stage where anything can happen. It’s going to be an incredibly exciting time,” she said.

Matthew Mohlenkamp highlighted NISA as a symbol of the new opportunities currently attracting the attention of the global asset management community. NISA has been a huge success in terms of account openings and inflows, drawing in new classes of investors, such as younger investors and first-time investors, while helping shift the overall mindset from deflation-appropriate saving to inflation-appropriate investing.

Mohlenkamp sees room to build on NISA’s success in the pension policy area. Last year, total balances invested in 401k and individual retirement accounts reached $28 trillion in the United States, where contribution limits are about 15 times higher than in Japan. “If you think about that kind of scale, this type of policy presents tremendous opportunities for Japan,” he said.

For his part, Kumagai is encouraged by Prime Minister Ishiba’s promise to continue the economic-policy framework of the Kishida administration. He has particularly high hopes for the boost that regional revitalization and labor-reform policies look set to deliver to real gross domestic product.

The panelists brought the session to an end by reviewing what they see as Japan’s essential strengths. After listing factors including social stability, manufacturing prowess and company longevity, Kumagai noted that if Japan manages to figure out how to tackle the twin challenge of an aging population and declining birth levels, it will have created an innovative model it can export to other countries facing the same issue.

Ogawa, meanwhile, praised the work ethic of the Japanese people and the competence of Japan’s “awesome” bureaucracy. Mohlenkamp spoke in similarly warm terms of the government-wide commitment to maintaining the reform program’s momentum. But let the last word go to the bullish Kumagai: “Japanese stocks clearly remain the most undervalued of all the major countries. There’s still plenty of room for them to rise.”

6. Lead Speech II

Accelerating the Growth of the Japanese Market

The Japanese market is at a pivotal moment, with opportunities grabbing the attention of global investors. A virtuous cycle of wage and price increases shows that both the corporate and household sectors are leaving behind deflationary thinking and adopting a “growth-oriented” mindset. Corporate capital expenditures are increasing, exceeding ¥100 trillion for two consecutive years. Domestic retail investors are increasingly shifting their “savings to investment,” investing more than ¥17.4 trillion through the new NISA (Nippon Individual Savings Account) in 2024.

The corporate governance reform initiative is helping Japanese companies realize their true value and pursue higher growth. In response to the Tokyo Stock Exchange’s call for “management to be conscious of the cost of capital and share price”, 85% of Prime-listed companies have disclosed improvement plans by the end of January 2025. We are receiving positive feedback from investors on the changes companies are making. Other developments such as mandatory simultaneous English disclosure are forthcoming, and the pace of change for corporate reform will only accelerate.

There is room for improvement, which is why many global investors are finding attractive investment opportunities. Japanese companies are now more open to new ideas and willing to make bold business decision. Active engagement is the key to further growth.

As a market operator, we are committed to continuing the reform, and improve the platform for both companies and investors, to actively engage in constructive dialogue and stive for further growth.

7. Panel Discussion II

A New Phase for the Japanese stock market: Ongoing and future changes

Masanori Yoshida, Nicholas Bratt, YoshikoYamaguchi, Yunosuke Ikeda

Has the Japanese stock market really entered a new phase? Based on 50 years’ experience investing in Japan, Nicholas Bratt cautioned that “this time it is different” were “the five most expensive words in the English language.” Nevertheless, he and his fellow panelists presented abundant evidence that Japanese companies and Japan’s investment environment have changed for the better.

The long list of positives that Bratt reeled off included reasonable valuations, strong balance sheets and improved corporate governance. At the same time, he stressed that the pace of corporate change - whether improving capital efficiency, moving from age-based hierarchy to flexible meritocracy, or having a majority of independent directors - was slow. “Investors expect faster movement on these fronts. Gradualism is an inherent cultural problem to which the Japanese people will adapt over time.”

Cultural problems in the investor relations field were discussed. While overseas investors welcome Japanese companies’ newly proactive approach to investor engagement, too many firms still prioritize quantity over quality of communication. Japanese firms always come to investor events with “50-page presentations with four charts per page and tons of text,” ruefully noted New York-based corporate access consultant Yoshiko Yamaguchi.

Yamaguchi wants Japanese firms to ditch this over-broad approach and instead present a few bullet points clarifying their point of differentiation and their strategy, while actively seeking out investors - whether ESG, value, growth or small-cap - whose ethos matches their own. “There are lots of interesting companies in Japan,” Yamaguchi said. “I’m hoping they can use good communication to find the right investors, attract investment and move the market off its current plateau.”

Like Bratt, equity analyst Yunosuke Ikeda has experienced several false dawns over his 30-year career. Despite that, he is an unabashed optimist. “It’s very exciting to witness what’s going on in Japan. Companies now have a very different mindset. This time really is different from previous episodes.”

What is behind Ikeda’s confidence? In addition to the positive impact of a slew of 2023/24 government initiatives, including METI guidance on corporate takeovers and the expanded New NISA, Ikeda highlighted the take-off of internal inflation due to the Covid pandemic, the Ukraine war and the tourism boom. As well as enabling Japanese companies to finally raise prices after decades of debilitating deflation, inflation also has a signaling effect that lets them distinguish between their robust businesses (where they can raise prices) and weak businesses (where they cannot) and streamline accordingly.

Another positive development Ikeda pointed to was increased labor flexibility, which has risen by 20% since 2019, bringing greater dynamism into the economy. He and Bratt share high hopes for what AI can do for Japan, be it solving the language barrier, helping solve labor shortages or supercharging manufacturing. “Rather than just mimic the Magnificent 7 tech companies in the United States, we should use the technology they develop in industry,” Ikeda said. “We’re far behind in utilization terms, so we have plenty of room to use AI technology.”

Since 1973, Bratt has seen Japan’s market rise to speculative highs and plunge to extraordinary lows. “The most important question is whether you should be investing in the Japanese market at the moment. My answer would be a resounding yes. There are outstanding companies that merit a place in global portfolios.”