International investors optimistic about Japan

The latest survey from BNY Mellon found that North American and European institutional investors are optimistic about investing in Japan, encouraged by Prime Minister Shinzo Abe’s ‘Third Arrow’ policies and by positive momentum in Japan’s corporate governance landscape.

According to the report, Investor Sentiment on Japanese Reform, 65% of surveyed investors find Abe’s ‘Third Arrow’ structural reforms as the most compelling aspect about investing in Japan, while 40% cited the policies’ ineffectiveness in revitalizing the Japanese economy as the biggest risk. In particular, survey respondents believe the introduction of Corporate Governance and Stewardship Codes are key drivers to spur change in corporate governance practices and drive higher shareholder returns. Independence of board directors (65%) and return-focused capital policy (60%) emerged as the most important components of the Codes to investors surveyed.

In another key finding, 60% of respondents said the negative interest rate environment did not affect their investment stance towards Japan, despite concerns over its effectiveness in bolstering the economy.

Investors taking part in the survey were from 19 large and small investment firms with aggregated equity assets under management of $679 billion, of which $49 billion is invested in Japanese equities.

According to Michael O'Brien, Vice President, Environmental, Social and Governance (ESG) Advisory, Depositary Receipts, at BNY Mellon, “Japanese issuers can better position themselves to international investors by prioritizing capital efficiency and returns. Investors would like greater access to senior management and encourage consistent visibility through attendance at global conferences, company hosted investor events and regular global non-deal roadshows. The pace of change will also be important for international investors to justify their continued allocation to Japan.”

While almost all survey respondents (19 of 20) pointed to some improvement in issuer behavior since the introduction of the Codes (adherence to which is voluntary), many investors (45%) indicated that their approach to investing in Japan has not changed. Respondents cited a potential box-ticking mentality (45%) and corporate culture (45%) as the biggest challenges to the adoption and implementation of the Codes.

“Environmental, Social and Governance (ESG) investing has grown significantly over the last few years as investors integrate ESG factors into their investment processes. It is encouraging to see good corporate governance being discussed more regularly in Japan since the introduction of the Codes,” said Neil Atkinson, BNY Mellon's Asia-Pacific head of Depositary Receipts.