Unlocking
Hidden Valuein Japan
The Nikko Asset Management
Investment Guide
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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Foreword
For the past few decades, there has been a general sense that global equity investors should
be underweight Japan. After all, investors have been hearing the same criticisms repeatedfor decades. Conventional wisdom says Japan is a country encumbered by a shrinking andageing population, stagnant growth, and a stale corporate culture, and should therefore be
avoided. Such criticisms are inaccurate and outdated. While many global investors still only
see the Japan of the past, they are missing out on the way Japan is shaping all our futures.
The Japan of today is one where a decade of corporate and stock market reforms has
started to bear fruit, and where successive governments have prioritised revitalising theJapanese economy. This has created a more shareholder-friendly environment and is
helping companies to deliver vastly improved profit margins thanks to superior technology,
stronger corporate governance and – particularly from within the Asia-Pacific region – better
economic growth.
But the investment case for Japan goes far beyond corporate improvements. At a time ofgreat global uncertainty and disruption, Japan has much to share with the rest of the world.
Japan is seen as a trusted global ally, and the world’s most persuasive trading partner. It isalso a significant – and vibrant – cultural force.
Arguably, Japan’s greatest challenge in recent times has been to take the lead in addressing
critical issues soon to be felt by many other nations. It is therefore no surprise Japan has
responded with humane and intelligent approaches to healthcare, and is also ready toaccelerate the transition from fossil fuels to low carbon alternatives. Japan is also embracingsome traditional ways of thinking – about sustainability and the circular economy – thatwill prove invaluable as the world looks to make the difficult transition towards a green
economy.
And while global investors have been looking elsewhere, Japan has spent invaluable timelearning from past mistakes, while demonstrating great resilience and strength. The changes
currently taking place in Japanese society have opened the door for companies with theknowledge and technology to tackle and solve social issues. For example, Japan’s demographic
challenges have resulted in exceptional innovation – particularly in the field of healthcare.
But above all, Japan displays a quiet determination to do things better, often for the benefit
of society as a whole. This is what makes Japan a long-term investment opportunity that
global investors cannot afford to ignore.
This investment guide is our way of telling the world about the Japan we know, the one we see
from the inside. We want to help bring more investors into Japan’s trusted inner circle, by
sharing our knowledge, offering a fresh perspective, and exploring the investment opportunities we think will resonate for the next decade and beyond.
We hope you enjoy reading this guide.
Stefanie Drews
President, Nikko Asset Management

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

The Japanof today
Chapter 1
John Vail
Nikko Asset Management Chief Global Strategist

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

The Japan of today
Japan’s economic, geopolitical and ‘soft power’ isrising, placing Japan on an upward trajectory forthe rest of the decade and beyond.
A democratic beacon
Home to one of Asia’s oldest democracies, Japan has
grown to symbolise a fair and free society, built on therule of law, freedom of the press and strong institutions.
Japan’s internal strengths, and as a model country, areundisputable. According to Human Rights Watch, theworld’s third-largest economy is a prosperous liberal
democracy with a vibrant civil society.1 Moreover, over
several decades, Japan’s main strategy for exerting
influence on the world’s stage has been through cultural
influence and measured diplomacy. Even China, one ofits closest neighbours and fiercest competitors, recognises
the value of being on good terms with Japan.
Political stability has been a feature in Japan for morethan a decade. Since regaining power in 2012, theLiberal Democratic Party, alongside its smaller coalition
partner Komeito, has been successful in multiple
national elections, a considerable achievement within ademocratic country. With the ruling coalition enjoying
firm public support, Japan has become a ‘safe haven’
compared to its developed market peers, including the
US. Furthermore, Japan’s political stability is critical toensuring the culture of corporate governance reform,
which began to accelerate during the ‘Abenomics’ era,is allowed to continue.
Economic improvements since the Abenomics era
When Shinzo Abe was voted into power for the second
time in 2012, on the back of an overwhelming majority,
his first task was to address the economic slump Japan
had fallen into since the 1990s. His ‘three arrows’ policy
programme of 1) higher government spending, 2) more
accommodative monetary policy from the Bank ofJapan and 3) a package of structural reforms intended toraise the economic growth was designed to shake theJapanese economy from its slumber.
Although Abe departed office due to ill health in 2020,
his two successors have continued in the same vein,
embedding Japan’s structural economic reform efforts.
Since Prime Minister Fumio Kishida took office in

1 https://www.hrw.org/world-report/2021/country-chapters/japan

November 2021, his government has wasted no time inreconfirming its accord with the Bank of Japan signed
in 2013 whereby they will work together to achieve 2%
inflation and sustainable growth. For example, the Bankof Japan’s purchases of Japanese government bondsand exchange-traded funds has helped lower the yen’svalue, which has supported export-driven companies andboosted Japanese stock prices significantly for almost a
decade. Japan’s monetary policy is expected to remain
accommodative, which will continue to create aconstructive environment for Japanese companies inthe decade to come.
The role of the yen in the Japanese economy
The Japanese yen (JPY) is the third most frequently
traded currency in the world after the US dollar (USD),
and euro (EUR).2 The yen gained a reputation for sharp
swings during the 1980s, and traditionally a weak yen isbelieved to bring positive effects to the Japanese
economy, as it helps exporters. However, since global
companies such as Toyota began to ramp up theirproduction capacity overseas, this has helped to lessen
the impact of yen fluctuations. While currency does
impact Japan’s exports, and a weaker yen is generally
positive, Japan should be considered as more substan­tial than a pure currency play. In many respects, the roleof the yen has become much less of an influence on
whether to invest in Japanese companies.
A nation growing accustomed to investingIn addition, Japan’s home-grown equity culture is
beginning to blossom. With the introduction of the
Nippon Individual Savings Account (NISA), based on
the UK ISA template, individuals are being actively
incentivised to build personal wealth through equity
investing, while benefiting from tax exemptions.
Although different alternatives are being worked
through, the NISA programme should help encourage
more of Japan’s population to move away from thetendency towards sitting on cash savings and instead
into owning their own investments, while also providing
further capital injection into successful businesses.
As of September 2021, the investments in regular
NISA accounts amounted to around JPY 23.55 trillion.

2 https://www.oanda.com/currency-converter/en/currencies/majors/jpy/

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Chart 1

Chart 2

Investment amount of Nippon Individual Savings(NISA) in Japan from 2018 to 2021, by type

What will the world look like in 2100?
Median age by region, 1950 vs. 2100

(in trillion JPY)
Junior NISA
20.99

15

0.1
0.06

10
5
0

14.98

2018

17.75
0.15
0.23
17.37

0.22
0.56

20.21

60
50

23.55

30

48

46

40
30

49

47

43

35
29

20

28
22

20

10
2019

2020

2021

Source: J apan’s Financial Services Agency (30 September 2021)

Demographics as a first-mover advantage
Japan boasts a highly-skilled labour force, has lower wages
compared to other developed market competitors, and,thanks to the Bank of Japan’s accommodative policy
stance, has cheaper financing than almost anywhere
else in the world. And yet, Japan’s ageing population has
often been used by global investors as a key reason not
to invest. Japan’s demographic challenge is well-known.
As a country with one of the world’s highest life
expectancies, the cost of treating the elderly is increasing
steadily each year – straining a healthcare system thatis financially dependent to a large degree on Japan’s
shrinking population of workers. But as Chart 2 demonstrates, an ageing population is not solely a concern forJapan; it’s an issue already impacting countries all over
the world. In this area, Japan can be considered ashaving first-mover advantage: it values its citizens and iscommitted to coming up with innovative ways to carefor them.
For example, robotic-assisted surgery systems help
surgeons to perform complex operations requiring highprecision. Although robotic technology originated in the
US Navy, and led to American companies dominating
the market, Japanese companies have started to overtake
their US counterparts. Today, the leading robotic surgery
system is Hinotori, jointly developed by Kawasaki Heavy
Industries and Sysmex Corporation. Hinotori is operated
remotely by a surgeon who views 3D images from an

19

0

As
La
ia
tin
th Am
eC e
ar ric
rib a
ea &
n

20

15.14

25.22
0.38
1.29

Oc
ea
nia

25

2100

Eu
ro
pe

Investment amount in trillion
Japanese yen

30

1950

Af
ric
a

Tsumitate NISANo
Am rther ernica

Regular NISA

Source: S tatista, United Nations Department of Economic andSocial Affairs

endoscope. In August 2020, Hinotori became the firstrobot-assisted surgery system developed in Japan toreceive regulatory approval from the Ministry of Health,Labour and Welfare.
Japanese companies have adapted, and grownprofitability
Just as ‘necessity is the mother of invention’ in criticalareas such as healthcare, Japanese companies acrossalmost all sectors have become adept at dealing withlabour shortages by adapting working practices andincreasing automation. Chart 3 shows Japan’s nearlytwo-decade inverse correlation between its declining
workforce and incline in corporate profits.
In fact, aside from interruptions from global crises,
Japanese companies have experienced a 20-year bull
market in profit margins, which can be attributed to a
combination of improved corporate governance,enhanced technology, and global, especially Asian,economic growth. Dividend payouts issued to investors(discussed in Chapter 2) have increased significantly
during this period also, and earnings per share growthhas been heightened ever further due to significant
share buybacks.

References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

There should therefore be little doubt that Japan cancounteract demographic challenges in innovative ways,
with corporate profits continuing their strong upward
trend, and thus rewarding shareholders, and that othercountries facing similar demographic concerns will belooking to Japan for guidance and inspiration.

ESG and Engagement Opportunities

Asian countries depend on Japanesetechnology as well as shared supply
chains for economic progress.
John Vail,
Nikko Asset Management Chief Global Strategist

Chart 3Chart 4

Secular growth in corporate profits,
despite demographics

MSCI World Index – Country Allocation

Japan Working Age Population (MM) Right Hand SideJapan Corporate Profits (Yen TT) Left Hand Side25

USA
65.53%
Japan
7.96%
Others
5.96%
United Kigdom 4.41%
France
3.41%
Switzerland
3.23%
Canada3.13%
Germany
2.90%
Australia
2.11%
Netherlands
1.35%

100
99
98
97
96
95
94
93
92
91
90

20
15
10
5

19
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
22

0

Where is Japan headed?

Source: OECD, Japan MOF (31 December 2021)

Japan is a vital investment conduit to Asian growth
Japan occupies a unique place in the world, serving as abridge between east and west, and between developedand emerging markets. Japan is the second largest
country in the MSCI World Index, and is the third-largest
economy in the world, after the US and China. Japan is
also the fourth largest global exporter.3 Close to 60% ofJapan’s exports are within the Asia Pacific region, themost common destinations being China, South Korea,
Chinese Taipei and Hong Kong, while only 25% of its
exports are to the Americas and 16% to others, including
Europe and Africa.4

Source: MSCI (30 June 2021)

Because of its close proximity, Japan has deep culturaland economic ties with other countries in the Asia
Pacific region. Japan is uniquely positioned as a familiar
developed market that is reaping the benefit of emerging market growth trends, while not necessarily being
exposed to the same accompanying risks. For example,
other Asian countries depend on Japanese technology
as well as shared supply chains for economic progress.
As Japanese companies grow their businesses overseas,and other Asian-Pacific countries, including China, rely
on Japanese technology to achieve their economic
development goals, Japan’s economic ties with Asia’s
growth journey should continue to strengthen.

3 https://oec.world/en/profile/country/jpn
4 https://oec.world/en/profile/country/jpn#yearly-exports

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

Chart 5

ESG and Engagement Opportunities

Where is Japan headed?

Chart 7

Japanese export destinations by country (2020)

TOPIX Forward Earnings vs CNY/JPY

Total: $623B

South Korea

2.53%
Malaysia
1.94%

6.88%

United States

MexicoCanadaSwitzerland

0.77%
Italy
0.64%

Netherlands

18%

1.31%

1.64%

PanamaAustralia

0.74%

Spain

0.4%

0.3%

Austria
0.24%

LiberiaSouth...

0.35%

0.27%

0.3%

Egypt

1.96%

0.21%

0.2%

BrazilChart 6

Japan’s exports to China, US and Europe
Western Europe

1600
1400
1200
1000
800
600
400
200
0

Source: Nikko AM, Bloomberg

20

21

20

20

CNY/JPY

While the success of Japan exports is increasingly tied todemand from China, its relative competitiveness andearnings prospects has also been driven by the currency
pairing of the Chinese yuan/renminbi (CNY) and the JPY.
Over the last two years, CNY/JPY has appreciatedroughly 30%, helping to lift forward earnings by nearly
70%. China’s determination to maintain a strong capital
account and strong currency policy is expected tocontinue to benefit the earnings of Japanese companies,
while also demonstrating the level of integration ofJapan’s economy within the Asian ecosystem.
Japan as a game-changer for the green economy
In the race to become carbon neutral, almost every
country in the world is likely to have a degree of relianceon Japan to help them achieve their net-zero ambitions,most likely through Japan’s dominance and leadershipin the fields of semiconductors and hydrogen.

20
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
1
20 0
1
20 1
1
20 2
1
20 3
1
20 4
1
20 5
1
20 6
1
20 7
1
20 8
1
20 9
2
20 0
21

JPY, Billions

United States

Moreover, since joining the World Trade Organization(WTO) in 2001, China has become an increasingly
important importer of Japan goods. As Chart 6 shows,Japan’s exports into China have grown nearly four-foldover the last two decades, whereas over the same
period exports to the US are flat and exports to Europe
are down.

0.61%

0.21%

Source: Observatory of Economic Complexity (OEC)

China

19

Russia France

Poland0.6%
New
Zealand14

Source: Nikko AM, Bloomberg (13 April 2022)

1.15% 0.9% 0.89%

1.67%

15

Qatar

Germany Belgium

1.56% United Kingdom

16

0.5%

0.98%

2.9%

17

TurkeySaudi Arabia

0.8%

18

20

1.5% 1.48% 1.32%
United ArabEmirates

19

18

Singapore

20

20

21.3%

21

17

2.59%

105
100
95
90
85
80
75
70
65
60
20

Philippines

India Indonesia

CNY/JPY

16

Vietnam

4.36% 3.93%

12M Forward Earnings

6.85%

TPX100 Index

20

Chinese Hong Thailand
Taipei Kong

China

1. Power semiconductors
Both China and the West are courting Japan because of the
raw materials required specifically for green technology
and the need for semiconductors. Besides producing
advanced semiconductors, it also dominates several of

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

the highest value-added portions of the semiconductor
production equipment process. As a recent press releasefrom Toshiba states, power semiconductors “are essential
components for managing and reducing power
consumption in every kind of electronic equipment, andfor achieving a carbon-neutral society”.5
Japan’s New Energy and Industrial Technology
Development Organization (NEDO) is coordinating a
project aimed at reducing the energy loss of power
management devices by 50% while reducing the cost of
mass-producing silicon carbide power semiconductors
to the same level as standard silicon-based chips by
2030. Reports suggest the Japanese government has
committed to spending JPY 30.5 billion (US$260 million)on the project, and private investment is believed to beconsiderably higher.
If successful, the widespread adoption of more advanced
power semiconductions would prove a ‘game-changer’
for energy-efficient green technology, resulting incheaper and more efficient electric vehicles, renewableenergy generation, computers, telecoms and datacentres,
as well as changing the way consumer electronics,
including air conditioning and lighting, consume energy.
2. Hydrogen
Reducing carbon emissions is critical to limiting the effects
of climate change, and hydrogen has drawn a significant
amount of attention as a clean alternative to carbon-­emitting fossil fuels. With nuclear energy a politicallydifficult option for Japan, hydrogen is expected to play a
key role in ensuring the country achieves its ambitious
goal of carbon neutrality by 2050. However, the drive
towards adopting hydrogen, and replacing fossil fuels is
still in its early stages, meaning there are many companies
with technologies and ideas that are yet to be discoveredby the market. But one particular company, Kawasaki
Heavy Industries, is already fast becoming a global
leader in the clean energy market.

ESG and Engagement Opportunities

Where is Japan headed?

companies can replicate, and it is capable of producing,storing and transporting the notoriously volatile fueland then using it to generate power. In 2021, it unveiled
the world’s first tanker capable of shipping liquidhydrogen. The firm is aiming for net sales of JPY 500 billion(US$4.5 billion) in its hydrogen segment by 2040.
We explore Japan’s potential in delivering hydrogen-­based clean energy further in Chapter 4.
The Japan of today: of increasing geopoliticalimportanceIn an era of fractious global politics, where international
economics and geopolitical issues have become
interlocked, Japan’s increasingly integral role in global
affairs is impossible to ignore. While Japan remains thelargest trading partner and most influential neighbourof China, Japan is also an essential partner for US policy
towards China. This is a delicate geopolitical balancing
act to maintain, but Japan is arguably one of very few
nations capable of maintaining the equilibrium between
these two superpowers.
In April 2021, Prime Minister Suga became the first foreign
leader to meet with US President Joe Biden, issuing a
joint statement promising a “global partnership for a
new era”.6 As a feature of this partnership, the US andJapan have pledged to further increase their inter-reliancein critical supply chain areas, while also cooperating on
expanding export control mechanisms. Moreover, fordecades, Japan has consistently sought to keep its
currency from rising against the dollar, fearing the effects
of a strong yen on its export sector. This alliance should
ensure Japan faces little pressure from the US regarding
currency appreciation.

Kawasaki Heavy is the only company in the world topossess core technologies related to every stage of thehydrogen supply chain. It has technology that few other5 https://toshiba.semicon-storage.com/ap-en/company/news/
news-topics/2022/02/corporate-20220204-1.html

6 US/Japan joint leaders statement, April 2021
References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

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8The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Chart 8Trust (2021, 2022)

Japan’s large capital reserves and its financial capabilities
are significant tools for geopolitical influence. Since wellbefore the Abe era, Japan has been engaged in skilful
diplomacy, not only with the US and China, but also theMiddle East and India, in offering a credible investment
alternative to China. Unlike China, which has recently
sparked more division than unity in its relationships withoutside investors, Japan has earned a reputation for amore liberal approach, and willingness to seek productive
relationships based on mutual economic development.
In its State of Southeast Asia Report 2022, the ASEAN
Studies Centre reported that, despite the challenging
geopolitical environment, Japan was still the mosttrusted major power among Southeast Asians, with 54.2%

US

EU

China

16.6%

18.0%

26.8%

48.5%

49.7%

52.8%

19.0%

Japan

India

Distrust (2021, 2022)
2022

China

India

US

EU

21.8%

15.3%

26.1%

29.0%

29.6%

31.1%

52.0%

58.1%

59.6%

2021

Japan’s ‘soft power’ is expanding
Because of its pacifist constitution, Japan’s military poweris essentially limited to self-defence. However, since China
overtook Japan to become the world’s second-largest
economy in 2010, Japan has become a master of thesubtle art of building soft power. Soft power is the term
used to describe how a nation’s cultural and economic
influence – rather than military coercion – can be used
to build trust, respect and in persuading other countries
to take action. Over time, soft power can build greaterbargaining power in international negotiations and exert
greater economic and geopolitical influence. Japan’s
soft power is undeniable across Asia and beyond, and is
the key to Japan’s more expansive and authoritative
presence on the global stage.

2022

47.0%

54.2%

2021

47.8%

Joint leaders statement,
April 2021

Trust and distrust rankings of major powers in ASEAN

68.2%

President Biden and Prime Minister
Suga recommit themselves to anindelible Alliance, to a rules-based
approach to regional and global
order founded on universal values
and common principles, and tocooperation with all those whoshare in these objectives. The UnitedStates and Japan will remake thesecommitments for a new era.

Japan

10% weighting was applied to 2021 data resulting in a change ofresults and rankings.
Source: The Southeast Asia 2022 Survey Reportof the respondents expressing confidence in Japan,
followed by the US (52.8%), and the EU (48.5%).7
Where does Japan’s soft power come from?
Japan’s cultural influence on the rest of the world isnothing short of phenomenal. Internationally recognised
as the home of consumer innovation and choice, Japan’sart, cuisine and retail brands have a global appeal andrarely attract negative criticism from inter­national
consumers. Japan’s reputation for technological

7 https://www.iseas.edu.sg/wp-content/uploads/2022/02/
The-State-of-SEA-2022_FA_Digital_FINAL.pdf

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9The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden valueinno­vation has earned the trust of international
consumers, and ensured famous Japanese brands, suchas Toyota, Honda, Bridgestone and Sony are viewed as
innovative, reliable, high-quality and efficient.
Despite the long shadow created by the COVID-19
pandemic, in sporting terms, the Tokyo Olympics in
2021 were a success for Japan. Finishing third behind the
US and China, Japan secured a record 27 gold medals.
Moreover, Japanese cultural influences – everythingfrom manga to Pokémon and Hello Kitty have enhanced
Japan’s global standing. As a result, other countries are
keen for international trade agreements that bring more
Japanese exports to their shores.
For example, Sony is one of Japan’s most iconic
consumer electronics brands, and has transformed itself
into a soft power titan, with a footprint spanning films,
music, gaming, and even financial services. A brandloved by its users, its PlayStation 5 (PS5) sold more than
10 million units worldwide in less than six months,
making it Sony’s best-selling gaming console ever.8 In
2022, Spiderman: No Way Home, produced by Sony
Pictures, became the sixth-highest grossing movie of alltime, with global box office receipts of US$1.8 billion.9
A conservation heritage
With 25 world heritage sites, Japan is a countryof outstanding natural beauty. It remains the top
travel destination for Southeast Asians for choiceof travel destination (22.8%) and has consistently
maintained its lead since 2020. Japan is also
widely considered to be a front-runner in global
environmental conservation. The Kyoto Protocol,
which was adopted in Kyoto, Japan, on 11 December
1997 began the global imperative that would
make countries make a clear and binding commitment to reducing the emission of greenhousegases known to contribute to global warming.

8 https://www.sie.com/en/blog/a-new-milestone-sie-sells-10-millionplaystation-5-consoles-globally/
9 https://variety.com/2022/film/news/spider-man-no-way-homeavatar-box-office-record-1235180474/
R eferences to individual stocks are for illustration purpose only and do notconstitute a recommendation to buy or sell.

ESG and Engagement Opportunities

Where is Japan headed?

Chart 9

Most preferred country to visit for Southeast Asians

Japan
22.8%
EU member state
19.2%
ASEAN member state 14.0%

Source: The Southeast Asia 2022 Survey ReportJapan’s influence as a free trade promoter
While the Japan of the past was successful, its growth
was aided by protectionist policies that placed toughrestrictions on imports from other countries, while
promoting exports. However, the Japan of today ismarkedly different in its approach. Japan’s growing
reputation as a reliable and trusted neighbour, andcommitment to expanding its area of soft power
influence, has helped it to emerge as Asia’s leading
voice on free trade and investment.
Joining the Trans-Pacific Partnership (TPP) in 2013 wasa core element of Abe’s expansionary economic
programme, not only through promoting Japan’s
economic and trade interests, but also ensuring politicalorder and stability for the Asia Pacific region as a whole.
After Donald Trump withdrew the US from the trade
agreement in his first day in office in 2017, Japan success­fully, and bravely, pressed for a rapid renegotiation, which
led to the Comprehensive and Progressive Agreement
for Trans-­Pacific Partnership(known as TPP-11), whichcame into force in 2018.
Even without the involvement of the US, the newagreement between 11 signatories is an impressive
and substantial undertaking. It creates an economic
block encompassing more than 500 million people,
in countries generating a combined US$11 trillion in
GDP. More importantly, TPP-11 is a forward-thinking
initiative, dealing with essential contemporary issues
such as e-commerce, telecommunications, state-owned
enterprises, anti-corruption, labour rights and theenvironment.

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10The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

EU-Japan Economic Partnership Agreement
Japan’s commitment to relationship building has notbeen confined to its more local neighbours. In 2019,
following talks that begin in 2013, the EU-Japan Economic Partnership Agreement (EPA) entered into force. Thisagreement establishes an economic zone of 635 million
people representing 30% of total world GDP and 40% ofworld trade.10 Overall, the EPA will ultimately remove
97% of the tariffs Japan currently applies to European
goods and 99% of those applied by the EU. Also, theagreement is unique in that it is the first trade deal toinclude a specific commitment to the Paris Agreement
on climate change.

Our country does not produce
natural resources. Our strength isthat we have people – a quite
well-educated population that isfairly diligent in doing things…
In order to utilise that asset, we haveto have interaction with the outside
world, and that definitely means
free trade, and creating a more
liberalised investment climate.11
Jun Yamazaki,
Japanese Ambassador to Singapore

The Regional Comprehensive Economic Partnership
Agreement
Japan was also a leading participant in the Regional
Comprehensive Economic Partnership Agreement(RCEPA) signed in 2020. The agreement (signed by 10
Association of Southeast Asian Nations (ASEAN) nations
as well as Japan, Australia, China, India, Korea and
New Zealand), will eventually eliminate up to 90% of
the tariffs on imports between the signatories – who
represents half of the world’s population, 30% of global

10 https://trade.ec.europa.eu/doclib/docs/2017/july/tradoc_155725.pdf
11 https://www.bbc.co.uk/news/business-47086737

ESG and Engagement Opportunities

Where is Japan headed?

GDP and about a quarter of world exports and foreign
investment. This is the first multi-lateral trade treaty
between China, Japan and South Korea, and will
significantly expand trade between Japan and China,
as well as the ASEAN nations and the other RCEPA
members.
SummaryJapan’s cultural influence, and willingness to take thelead with diplomacy and international relationships has
given it significant geopolitical authority, and presented
an important counter-narrative to the protectionism
prevalent in other key markets. This in turn, has contributed
positively to Japan’s economic growth, helping to createa ‘positive feedback loop’. In an era of instability andinsecurity, Japan’s moderate and harmonious perseverance
is a quality many nations wish to emulate and benefit
from. The world wants to do business with Japan, andequity investors are recognising the investment potential
this also brings.
Where Japan leads, others will follow.

Key chapter points• 	The economic and corporate reforms initiatedunder Shinzo Abe remain locked-in, and Japan’s
soft geopolitical power is increasing on multiple
levels.
• 	Japanese companies are overcoming demographic challenges through innovations such as
robotics, while its green technology (especiallythe development of hydrogen as an energy
source) demonstrates the scale of its ambition.
• 	Although Japan’s success is increasinglyinterlinked with the rest of Asia, it is also forging
deeper trade and diplomatic connections
across the world, including with Europe and the
Middle East. As other countries have stepped
back, Japan has bravely emerged as the newleader in global free trade.
Chapter 2 explores Japan’s improved corporate
environment, outlining the reforms laying thefoundations for future commercial success, as wellas the evolving dividend culture.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Japan’s new
corporate climate
Chapter 2
Junichi Takayama
Nikko Asset Management Japan Equity Investment Director

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12The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Japan’s new corporate climate
Japan’s resurgence is supported by governancereform and a progressive corporate climate, making
it increasingly attractive for overseas investors –and building the foundations for Japan’s future.

also maintaining the need for independent oversight.
Since then, Japan’s Corporate Governance Code has
been revised further in 2018 and again in 2021, tostrengthen corporate governance practices withincompanies.

An improved corporate culture
Japan used to be routinely criticised by global investors
for its inflexible, weak and outdated corporate culture.
But the Abe administration placed corporate governanceas one of the key components of its reform agenda.
It recognised that opening Japanese companies up to
greater scrutiny would improve their performance andmake corporate Japan more competitive on a global scale.

The main points of the most recent revisions were:• 	Enhancing board independence: Prime-listedcompanies are required to increase the number of
independent directors to ‘a minimum of one-third’of their board, from the previous requirement of‘at least two’ independent directors. The Code also
calls for companies to have independent directors
with managerial experience at other companies.
• 	Promoting diversity: Companies should disclose theirpolicy and voluntary measurable targets aimed atpromoting diversity by appointing females, mid-careerand non-Japanese professionals. Businesses should
also disclose human resource development policies
to ensure diversity and include the status of
implemen­tation.
• 	Sustainability and ESG: Prime-listed companies will
be required to improve climate-related disclosure
based on Task Force on Climate-related Financial
Disclosures (TCFD) recommendations or equivalentinternational frameworks.

Strengthening boardroom independence
One of the first initiatives aimed at strengthening corporate
governance was for firms listed on the Tokyo Stock
Exchange to increase the number of independent board
directors. In 2014, the Tokyo Stock Exchange changed its
guidelines, recommending companies have at least one
independent director on their respective boards. In thesame year, the Companies Act was amended to requirecompanies without independent directors to explain
their reasons for this at shareholder meetings.
In 2015, a new Corporate Governance Code was intro­duced, which stated companies should have at least
two independent directors. The Code also helped fostera climate of disclosing and communicating important
governance and risk management information, while

Chart 10 shows the number of independent directors
since the Corporate Governance Code was introduced
in 2015, and following the subsequent revisions. It appears

Chart 10The changing board composition TOPIX companies
Female board members

12%
June 2021: Second revision of CG Code

10%
8%
6%
4%

June 2018: First revision of CG Code

2%

22
20

21
20

20

19
20

20

18
20

0%

17

16
20

14%

20

15
20

45%
40%
35%
30%
25%
20%
15%
10% June 2015: Introduction of CG Code
5%0%

Female board members

Independent directors

Independent directors

Source: QUICKUNLOCKING HIDDEN VALUE IN JAPAN THE NIKKO ASSET MANAGEMENT INVESTMENT GUIDE

13

The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

the tipping point for independent directors has beenreached. There has also been a steady increase in thenumber of women appointed to company boards since
the Abe era. Moreover, the promotion of diversity is
expected to open up old school, male-dominatedboardrooms to new talent with different perspectives.
Finally, other important changes include calling forEnglish disclosure and higher transparency on strategies
with respect to business portfolios, which will not only
help investors to gain a better understanding ofcompanies but will enable them to engage withmanagement teams more effectively.

ESG and Engagement Opportunities

Where is Japan headed?

enhancing the global competitiveness of the Tokyo
Stock Exchange. Companies will be subject to a more
stringent listing criteria, as well as being required toadhere to certain corporate governance standards orface the prospect of being demoted or delisted. As well
as being required to disclose investor information in
English, companies listed on the Prime Market will be
expected to provide enhanced investor disclosure on
climate change (based on Task Force on Climate-Related
Financial Disclosures (TCFD) or equivalent).
New section requirements
The new Prime section is now solely for companies thathave demonstrated they can have “constructive dialogue”
with investors. Companies must have tradeable sharesaccounting for over 35% of shares outstanding and havea tradable market cap of over JPY 10 billion. As mentioned
previously, Prime Market companies must also have a mini­mum of one-third of independent directors on the board.

Tokyo Stock Exchange restructuring
On 4 April 2022, the five segments of the Tokyo Stock
Exchange (First Section, Second Section, Mothers, JASDAQ
Standard and JASDAQ Growth) were restructured into
three sections (Prime Market, Standard and Growth).
The First Section used to be viewed as a market whereby,
once listing requirements were achieved, companies faced
little incentive to make corporate improvements, andtheir position within the market was seldom threatened.

The Standard section will accommodate companies
that can demonstrate sufficient liquidity and possessgovernance levels considered of a high enough standard
for open market investors. Companies must have
tradeable shares accounting for over 25% of shares
outstanding and have a tradable market cap of over
JPY 1 billion. The Growth section will focus on newer
companies with high growth potential, but still havework to do before being considered suitable for inclusion

The biggest rationale behind the reform was therefore to
remove corporate complacency, by ensuring companies
were motivated to keep improving their business
operations or risk being delisted. As a result, the moveshould result in higher shareholder value, thereby
attracting more capital into the Japanese market andChart 11

The Tokyo Stock Exchange’s new structure
Number of Listed Companies
Old
Market Segment

New Market
Segment

Prime Market

Standard Market

1,839

338

2,177

Second Section*JASDAQ Standard

1,127

1,127

Mothers*JASDAQ Growth

1

465

466

First Section

Growth Market

Total

New listing on 4 April 2022

-

-

1

1

Listed Companies in the
New Market Segment

1,839

1,466

466

3,771

Disclosure of plans to meet
the Continued Listing Criteria

295

209

45

549

*The number of listed companies in the old market segment is as of 3 April, 2022, and the number of listed companies in the new market segment is as of 4 April, 2022.

Source: 2022 Tokyo Stock Exchange, Inc.

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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14The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

in either of the other two markets. Companies musthave tradeable shares accounting for over 25% of shares
outstanding (and at least 150 shareholders), and have a
tradable market cap of at least JPY 0.5 billion.
According to the Tokyo Stock Exchange, 664 companies(roughly one-third) formerly listed in the First section
did not meet listing requirements for the Prime Market
when they applied to join in 2021. Those companies
were given the option of either carrying out corporate
actions that would satisfy the Prime Market, or face a“demotion” to Standard if they were unable to meet therequirements. As a transitional measure, the Tokyo Stock
Exchange allowed companies to be listed on Prime on
condition they submitted a plan to meet the requirementin the future, although no clear deadline for submissionof these plans was stated.
‘Comply or explain’ is better for investors
After the new structure was announced, many large
shareholders began disposing of their shares at therequest of companies, to ensure the company met themore stringent listing requirements. Managementbuyouts, share buybacks and full consolidation of listed
subsidiaries also increased—thereby unlocking value.
The restructuring took place on 4 April 2022. While theTokyo Stock Exchange gave companies a generous
window in which to comply with the new listing rules,
its ‘comply-or-explain’ policy is clearly intended to createa more level playing field for various investors in Japanover time. Moreover, the 295 companies that did notmeet the requirement but ended up getting listed on
the Prime Market as a transitional measure were all
required to submit plans to take corrective actions.
These companies will continue to be under scrutiny
by the bourse, and more widely by investors.
Shareholder activism is increasing
Shareholder activism was once considered taboo inJapan. However, this has also changed over time.
In 2014, there were only seven activist investors targeting
Japanese companies, but as Chart 12 demonstrates, as
more have recognised the attractiveness of the Japanesemarket, that number has increased to 44. There is evena Japanese retail fund employing an activist strategy.
Shareholder activism also now comes in many forms,
including the old-school ‘greenmailer’ asset-strippers,
participation groups focused on constructive boardroom
engagement, and other investors choosing to take ahands-on approach to initiate change.

ESG and Engagement Opportunities

Where is Japan headed?

Chart 12

Shareholder activists in Japan
Activists are increasingly exerting more pressure on companies
to unlock value
US/European

Asian

Japanese

50
40

8
7

30
20
10
0

13
3

3
2
4

3
2
6

4
4
8

2014

2015

2016

2017

13

8

5
6

20

23

2019

2020

13

2018

Source: IR Japan

Investors are making themselves heard
Market culture has been changing dramatically, allowing
shareholders to be more vocal, and sometimes evenhostile, to the companies they invest in. Crucially, thelines between shareholder activism and stewardship areincreasingly blurred, particularly due to the increased
prevalence of ESG considerations at boardroom level.
In recent years there has been an increase in share­
holder activism related to human capital management,
especially following the COVID-19 pandemic, wherepoor human capital practices were blamed for highlevels of employee attrition, as well as poor output andproduct quality. This trend of engagement on humancapital issues is now a worldwide phenomenon, andJapan is no exception.
The key point is that when activist investors choose tochampion issues that would be in the collective interestof all shareholders, they can now expect to gain support
from institutional investors who share the same concerns
and are required by the Stewardship Code to act in thebest interests of their clients. In other words, activists
now have the leverage to make things happen.
Corporate takeovers more likely
While activist investors are making their presence felt,
strategic investors are stepping up their efforts to acquirecompanies outright – often without the prior consent of
the target company’s management teams, as Chart 13
shows.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

Chart 13

Number of hostile tender offers on the increase
10
9

8
6

6
5

4
2
0

2

1

2017

2018

2019

2020

2021

Source: IR Japan (31 December 2021)

SBI Holdings versus Shinsei Bank
One such example was the showdown between online
financial firm SBI Holdings and Shinsei Bank, which
resulted in the first-ever hostile acquisition attempt inJapan’s banking sector. In September 2021, SBI Holdings
launched a tender offer for Shinsei Bank’s shares, in an
attempt to turn Shinsei Bank into its subsidiary. To fend
off the takeover attempt, Shinsei Bank used a ‘poison pill’
defence and put the proposal to a vote at an extra­
ordinary shareholders’ meeting in November 2021.
The Japanese government held a stake in Shinsei Bank(as the result of a bail-out in the 1990s) and it was widelyreported that the government agency that held theshares would not support the poison pill measure.

ESG and Engagement Opportunities

Where is Japan headed?

This sent a clear message to capital markets that theJapanese government favours competition for corporate
control and viewed it as beneficial for investors andsociety. Shinsei Bank eventually withdrew its poison pill
and cancelled the extraordinary shareholders’ meeting.
SBI Holdings’s tender offer for Shinsei Bank was acceptedin December 2021, and the two parties agreed to integrate
and collaborate under a new management team.
Improved dividend prospects for investors
The more competitive environment for Japanesecompanies has resulted in corporates placing greater
emphasis on shareholders, and efforts to return more
capital to them. At the time of writing, companies inJapan have demonstrated considerable resilience fromthe negative consequences of the pandemic, andcorporate Japan’s more conservative approach to cash
preservation has granted many businesses with stronger
dividend cover compared to other developed market
competitors, especially those in the US. As a result,Japanese stocks are sitting on significant excess cash
levels, leaving plenty of room for further shareholder
returns, making Japan an attractive income investment
destination. Chart 14 shows the dividend yields of Japan(TOPIX) and US (S&P 500). Japan’s current dividend yieldlevel, and the potential upside in dividends compared to
the US, warrants closer attention from overseas investors.
References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

Chart 14

Dividend yields of TOPIX and S&P 500
TOPIX Index

S&P 500

3.5%
3.0%
2.5%
2.0%
1.5%

20

20
/
20 01
20
/
20 02
20
/
20 03
20
/
20 04
20
/
20 05
20
/
20 06
20
/
20 07
20
/
20 08
20
/
20 09
20
/
20 10
20
/
20 11
20
/
20 12
21
/
20 01
21
/
20 02
21
/
20 03
21
/
20 04
21
/
20 05
21
/
20 06
21
/
20 07
21
/
20 08
21
/
20 09
21
/
20 10
21
/
20 11
21
/
20 12
22
/
20 01
22
/
20 02
22
/
20 03
22
/0
4

1.0%

Source: Bloomberg (20 April 2022)

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Chart 15

Japan, US dividend yield relative ratio
TOPIX/S&P 500

20

20
/
20 01
20
/
20 02
20
/
20 03
20
/
20 04
20
/
20 05
20
/
20 06
20
/
20 07
20
/
20 08
20
/
20 09
20
/
20 10
20
/
20 11
20
/
20 12
21
/
20 01
21
/
20 02
21
/
20 03
21
/
20 04
21
/
20 05
21
/
20 06
21
/
20 07
21
/
20 08
21
/
20 09
21
/
20 10
21
/
20 11
21
/
20 12
22
/
20 01
22
/
20 02
22
/
20 03
22
/0
4

1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0

Source: Bloomberg (20 April 2022)

Chart 15 shows the relative ratio between the twomarkets (Japan dividend yield divided by US dividend
yield); we can see that from this perspective Japan iscurrently more attractive. Furthermore, from a broader
perspective, the Japanese equity market has shown atendency to perform better than its US counterpart
when US yields are rising (Chart 17). This characteristicoffers investors the option to diversify away from the US
market, with its heavy exposure to the tech sector, at atime when interest rates are expected to rise.

Chart 16

Equity duration TOPIX and S&P 500
Number of years for invested capital to be recouped
80
70
60
50
40
30
20
10
0

69
years
40
years

TOPIX Index

S&P 500

Japan’s dividend prospects in an era of higher
interest rates
Chart 16 shows the ‘equity duration’ – the number ofyears it theoretically takes for invested capital to be
recouped (the inverse of dividend yield) – of the TOPIX
and the S&P 500. Japan’s equity duration is 40 years,
while the equity duration of the US index is 69 years.
A shorter duration can be construed as less sensitivity
to interest rates as the proportion of cash flows thatmake up a stock’s value will likely be received sooner.
Therefore, the Japanese equity market could fare better
when interest rates rise.
Summary
Corporate culture in Japan is clearly changing. The current
structural reform programme is doing what it set out
to achieve, improving the attractiveness of Japanesecompanies, and giving investors more reasons to invest.
A more transparent, competitive and dynamic environmentis helping to build better businesses that are dedicatedto maximising shareholder value. This value will only
increase for those investors entering the Japanesemarket in the post-pandemic era. As the after-effects of
the COVID-19 pandemic continue to fade, investors will
become more focused on structural change that
unlocks and builds value.

Source: Bloomberg, 20 April 2022

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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17

The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Chart 17

TOPIX tends to fare better than S&P 500 when US yields rise
TOPIX (yoy) - S&P (yoy)

UST10yr (12M change, RHS)

22
20

21

20

20

20

19

18

20

20

17

16

20

20

15

14

20

20

13

12

20

20

11

10

20

20

09

08

20

20

07

06

20

20

05

04

20

20

03

02

20

20

01
20

00

2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5

20

19

99

50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%

Source: Bloomberg, 31 March 2022

Also, as Japan aims to become carbon-neutral by 2050,
the pivot towards hydrogen noted in Chapter 1 should
serve as another long-term catalyst for structuralchange. Japanese companies have an abundance ofadvanced technology related to hydrogen energy,
including those linked to automobiles and energy
infrastructure, and these companies and sectors standto benefit as global economic conditions improve. Thisis shaping up to be an exciting period for Japanesecompanies, and a potentially significant opportunity forinvestors to give due consideration.

Key chapter points• 	Since Abe’s premiership, improved corporate
governance has become integral to corporate
Japan, and companies must ‘comply or explain’
to avoid damaging consequences.
• 	Now on a firmer footing, corporate activity inJapan has accelerated, with more takeovers,
more shareholder engagement and activism
leading to a more dynamic stakeholder-friendly
corporate culture.
• 	One aspect of this involves greater dividend
activity, as Japan becomes a more mature– and more competitive – environment forshareholders.
Chapter 3 explores how stocks can continue
to maintain and grow shareholder returns, andhow investors can unlock the hidden value
within Japan’s equity markets.

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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18

The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Unlocking Japan’s
hidden value
Chapter 3
Junichi Takayama
Nikko Asset Management Japan Equity Investment Director

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19

The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Unlocking Japan’s hidden value
Although growth investing has led following the
global financial crisis, Japan’s value stocks are now
in the ascendency. Crucially though, value investing
is about knowing where to look and when to invest.

The Japan of today
As Charts 18, 19 and 20 illustrate, the market environment for Japanese equities is in a much healthier statecompared to the bubble era. At the end of March 2022,
the Nikkei’s Forward P/E ratio is a healthy 14x. Moreover,its P/B ratio is now at just 1.3x compared to the 5.0
reached in 1988.

Since the global financial crisis, the low economic
growth, low interest rate era has kept growth investingin the spotlight, both in Japan and across the rest of theworld. However, a turnaround for value stocks is currently
underway, and looks set to last for several years. Why isthis shift being ignored by global investors? To answer
this question, you must start by examining the past.

Similarly, the dividend yield of the Nikkei demonstrates
how shareholder expectations have evolved. Back in
1988, when overseas investment into Japan was at its
peak, the Nikkei’s dividend yield was a modest 0.46%,
as Japanese companies placed little importance on
dividends at the time, and valuations were stretched.
In 2022, the Nikkei dividend yield has risen to a much
more favourable 2.45%.

Comparing the bubble era and the present
Compared to the 1980s, Japan’s market environment
has changed dramatically. In 1988, the Nikkei 225 wastrading at a price-to-earnings ratio of 63x, due primarily
to excess liquidity and amid a proliferation of widely-­
criticised cross shareholdings. The price-to-book ratioof the Nikkei index was 5x, suggesting many of its
constituents were heavily overvalued and artificially
supported. As Japanese equities fell from their exaggerated valuations, and entered into two consecutive‘Lost Decades’, this pushed value to the periphery, andinvestors have spent the subsequent years avoiding
Japan and its so-called ‘value traps’.

The secular, structural changes
unfolding in Japan are alsosignificant tailwinds for value-driven
investing.
Junichi Takayama,
Nikko Asset Management Japan Equity Investment Director

Chart 18

Nikkei price/earnings ratio: 1988 vs 2022
Period: Jan 1977 - March 2022
Nikkei 225 P/E

43,00038,00033,00028,00023,00018,00013,000
8,000
3,000

1

/0
1

/0

22

20

20

20

/0
1
15
20

/0
1
10
20

/0
1
20

05

/0
1
00
20

/0
1
95
19

1
90
19

/0

1
85
19

/0

80

/0

1

Forward P/E (X)

100
90
80
70
60
50
40
2022: Fwd. P/E 14x 30
20
10
0

19

19

77

/0
1

Nikkei 225 Index (Yen)

Nikkei 225 Price

Source: Mizuho Securities, based on data by Nihon Keizai Shimbun and Toyo Keizai

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

UNLOCKING HIDDEN VALUE IN JAPAN THE NIKKO ASSET MANAGEMENT INVESTMENT GUIDE

20

The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Chart 19

Nikkei price/book ratio: 1988 vs 2022
Period: Jan 1977 - March 2022
Nikkei 225 P/B
7643

P/B (X)

5

2022: P/B 1.3x 2

1

1

1

/0

/0
20

20

20

22

1
/0
15
20

1
10
20

20

/0

1
05

/0

1
/0
00
20

19

95

/0

1

1
19

90

/0

1
/0
85

80

/0

1

0

19

19

77

/0

1

43,00038,00033,00028,00023,00018,00013,000
8,000
3,000

19

Nikkei 225 Index (Yen)

Nikkei 225 Price

Source: Mizuho Securities, based on data by Nihon Keizai Shimbun and Toyo Keizai

Chart 20

Nikkei dividend yield: 1988 vs 2022
Period: Jan 1977 - March 2022
Nikkei 225 Dividend Yield
3.5
3.0
2.5
2.0
1.5
1.0
0.5
22
/0
1

20

/0
1
20
20

/0
1
20
15

10
/0
1

20
05

20

20

/0
1

01
00
/

1
5/
0
19
9

90
/0
1
19

85
/0
1
19

80
/0
1

0.0
19

19
7

2022: Div. Yield 2.45%

Forward Dividend Yield (%)

43,00038,00033,00028,00023,00018,00013,000
8,000
3,000
7/
01

Nikkei 225 Index (Yen)

Nikkei 225 Price

Source: Mizuho Securities, based on data by Nihon Keizai Shimbun and Toyo Keizai

Structural reforms are benefiting value-heavy
sectors
Importantly, the secular, structural changes unfolding inJapan outlined in Chapters 1 and 2 are also significant
tailwinds for value-driven investing. Japan’s high level ofcross shareholdings – long associated with corporate
underperformance, complacency and lax governance– has declined sharply since its peak in the early 1990s.

The unwinding of these shareholdings reflects thechanging relationship between Japanese companies,
senior management and shareholders. Also, Japan’s
steady programme of market reform initiatives, including
the realignment of the Tokyo Stock Exchange, has thepotential to accelerate improvements in corporate
governance and unlock previously overlooked value
opportunities.

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

UNLOCKING HIDDEN VALUE IN JAPAN THE NIKKO ASSET MANAGEMENT INVESTMENT GUIDE

21

The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

Sector breakdown by country and region

Japan

50%

US

45%

EU

Others

0%

20%

17%

30%

25%

40%

40%

From a portfolio construction perspective, Japan equities
offer attractive diversification benefit due to its relatively
low correlation to other equity markets. While Europe ishighly correlated to the US (0.85), Japan’s correlation to
the US and Europe are relatively low, 0.64 and 0.68,
respectively.

Defensive sectors

33%

31%

29%

60%

Where is Japan headed?

domestic investment from Japanese investors alreadyoutlined.

Chart 21

Cyclical sectors

ESG and Engagement Opportunities

80%

100%

Source: SMBC Nikko Securities

Japan’s long-term cyclical and diversification
opportunities
Japan is the most sensitive to economic cycles among
the major economies, with the highest proportion of
cyclical stocks compared to the US and the EU (Chart 21).
As global economies recover from pandemic-caused
downturns, we expect foreign investors to reconsider theirstance on Japan and start increasing their allocations.
This, of course, is alongside the greater prevalence ofDespite Japan’s tighter trade relations with China andthe Asia ex-Japan region, its equity market correlation
with the region is just 0.57, reflecting a significantly
different risk profile. From this perspective, Japanbenefits from Asia growth but is not exposed to thesame market risks, such as with the impact of the
US-China trade war, or more recent China regulatory
crackdowns.
In addition, the long-term global shift toward a decarbonised society will continue to present opportunities
for companies with environmentally-friendly technologies, especially in hydrogen and battery technology.
Japanese companies within the value sphere have anabundance of advanced technology related to hydrogenenergy, including those linked to automobiles and energy
infrastructure, and these value plays stand to benefit
significantly from improved economic conditions.

Chart 22

Japanese equity correlation to other equity markets
Correlation Matrix (20Y)
Japan
Japan

Average Pairwise Correlation

USEuropeAsia ex

LatAm

EMEA

DM

EM

Global

0.64

0.68

0.57

0.46

0.58

0.66

0.53

0.58

0.85

0.74

0.67

0.71

0.74

0.70

0.72

0.69

0.63

0.67

0.76

0.66

0.70

0.75

0.81

0.66

0.78

0.71

0.83

0.58

0.79

0.67

0.65

0.82

0.72

US

0.64

Europe0.68

0.85

Asia ex

0.57

0.74

0.69

LatAm

0.46

0.67

0.63

0.75

EMEA

0.58

0.71

0.67

0.81

0.83

Source: Bloomberg (April 2022)

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

Chart 23 below suggests the turning point has beenreached, that the divergence in returns between growthstocks and their value counterparts has become extreme,
and that a period of reversion to the mean is the most
likely consequence. With a shift from growth to value
already underway, running alongside the upward pathof interest rates, this presents a long-term opportunity
for value-driven investments.
The question for investors now is this: if Japan now
presents a significant investment opportunity, how caninvestment managers best capture it?
Capturing value opportunities
It seems almost inexplicable to suggest the equity marketof the third-largest economy in the world is overlooked
and under-researched, but that is unquestionably still
the case. Most global equity managers have a structural
underweight to Japan, and they are quick to dismiss it
as characterised by slow growth and lowly returns.
Also, with growth having been in the spotlight for two
decades, value opportunities are still frequently overlooked by the broader market, and especially those withlong memories of ‘value traps’.
To combat this perception, investment in today’s Japan
must begin with ensuring value traps are avoided,and by creating the environment wherein true long-termvalue can be discovered. To be successful, a combinationof ‘horizontal’ and ‘vertical’ research must be employed.

ESG and Engagement Opportunities

Where is Japan headed?

Blending horizontal and vertical research
Horizontal research – the accumulated knowledge ofJapanese companies and industries – is essential toidentifying value companies and unlocking value.
Context is key. Having a historic understanding ofJapanese companies provides insights that can help todetermine:• Why	the company is trading at a low valuation,
within a broader context• The quality of management• Balance sheet strength• Non-financial	
information not yet priced-in by themarket, but indicative of future earnings and cash
flow generation
All of these, and more, can offer signals for a potential
catalyst leading to positive change.
However, to access information beyond financial
statements, sell-side research, and local news flow, an
on-the-ground presence is needed. A vertical research
approach can deliver invaluable insights that help put into
context the idiosyncratic risks of individual companies
and sectors.
In vertical research, questions can be asked that only
individuals with a real-world and real-time knowledge ofthe organisation can answer. Therefore, when meetingcompanies it’s important to not just meet with senior

Chart 23

Value vs growth (cumulative returns)
Russell Nomura Value Index over TOPIX Price Index

Russell Nomura Growth Index over TOPIX Price Index

21
20

20
20

19
20

18
20

17
20

16
20

15
20

14
20

13
20

12
20

11
20

10
20

09
20

20

08

120%
115%
110%
105%
100%
95%
90%
85%
80%
75%

Source: Tokyo Stock Exchange and Russell/Nomura Japan Equity Index (31 March 2022)

Any comparison to a reference index or benchmark may have material inherent limitations and therefore should not be relied upon

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

management, but with its employees throughout theorganisation, from product developers to factory floor
workers. Not only can vertical research help to deepen
an understanding of a company, including opportunities
and risks, it can also strengthen the relationship withsenior management, introducing insights and obser­
vations that can be used to inform, educate and change
the company from within.
Catalyst-driven investment
The aim of blending horizontal and vertical researchwithin value investing is to identify catalysts. Catalysts
can be either supply-side, such as corporate restruc­turing or management reshuffles, or demand-side,through the launch of new products and services(as in the case with Nintendo, following the launch of
its Nintendo Switch gaming system which can be usedanywhere).
The process of identifying catalysts can include looking
for companies whose management and employees
share a sense of crisis that propels them to implement
the changes needed to unlock value. This requires apatient approach, since such structural changes often
take time to manifest. A value-driven investment team
may research a company for three to five years before
making an investment, but when the investment ismade, it will be held for a similar (if not longer) period.
Relationship building
One of the fundamental advantages of a value-driven
approach to Japanese equities, is that it complements
the new corporate environment being built in Japan.
Trust remains a highly valued currency in Japan, and at
its core, value investing aims to develop and maintaindeep and lasting relationships with companies – acrossall levels of its corporate structure – to build highconviction positions. Although the relationship between
Japanese companies and shareholders has become
more demanding, and more contentious, at times, therelationships that these companies foster with investment
managers can be more constructive, with the investment
managers occupying the middle ground between thecompany and other shareholders.

ESG and Engagement Opportunities

Where is Japan headed?

Summary
Whereas Japan’s equity markets were historically undercut by weak institutions and brittle governance, theopposite is true today. Japan has learned that corporate
reform and strong governance is an evolutionary
process, and equity markets are now firmly underpinnedby the country’s more mature economic foundations.
The long-awaited turnaround in Japanese equities isstill in its early stages, but the momentum is building.
As structural changes encouraging better corporate
governance and increased shareholder engagement
continue, Japanese companies will continue to experiencecatalysts that unlock hidden value. In this type ofmarket, applying a value-oriented investment approach
can be extremely effective in delivering stable, long-term
returns, especially when compared to a momentum-led
approach.

Key chapter points• The	 Japanese equity market is in a much
healthier state compared to 30 years ago, andenjoys a more competitive environment that
increases the potential of value catalysts.
• Moreover,	
the rebound in long-overlookedvalue stocks has also just begun, with the cycle
at the early stages of its value-supportive phase.
• A	 combination of active engagement alongside
deep horizontal and vertical research can help
to mitigate risks, avoid value traps and unlock
hidden value that others miss.
Chapter 4 focuses on Japan’s role as a leader inclean energy technologies, and how companies
are satisfying the needs of all stakeholders
through ESG engagement.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

ESG andEngagement
Opportunities
Chapter 4Masahiko Komatsu
Nikko Asset Management Active Ownership Group Manager,
Equity Fund Management Department
Kozue Saito
Nikko Asset Management Japan Equity Value Analyst and Active
Ownership Group Analyst, Equity Fund Management Department
Hiroki Wakita
Nikko Asset Management Active Ownership Group Analyst,
Equity Fund Management Department

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

ESG and Engagement Opportunities
While in today’s world many companies display
their ESG credentials like a badge, Japanesecompanies have long held a sustainable mentality,
even though they seldom articulate this more
widely. That’s because in Japan, a deeply ingrained
connection to the environment and society has
always been common sense, not something thatneeded to be articulated.

and housing – were recycled and reused”.12 As the restof the world slowly adapts by introducing their versionsof a sustainable circular economy, these instincts are
already ingrained in Japanese culture as seen in chart 24,
and are therefore being reintroduced at a faster rate ofprogress.

Japan’s circular economy has deep roots
It’s impossible to look at the Japan of today without
remembering its history. Japan’s deep connection to theenvironment and society has been a feature for centuries,
dating back to the Edo period from the 17th to 19th century.
During this period, when Japan’s economy was effectively
closed off from the rest of the world, its urban economy
was nurtured with a respect for nature and determination
to maximise all available natural resources.

And yet today, across many important ESG metrics, Japanlags its developed market peers, meaning there is still theopportunity for significant improvement. Active engage­
ment of Japanese companies is therefore essential inorder to 1) encourage them to better articulate positive
ESG activities already underway, or 2) drive new ESG
initiatives forward, thereby unlocking further value. As theworld’s third largest economy, with an investment universeof 3,700 companies, there is clearly a lot of work to be done,
but meaningful engagement on ESG principles certainly
has the potential to deliver extremely positive results.

According to historian Tanaka Yuko: “Edo was a circular
economy in which energy and resources were supplied
domestically and all major life resources – clothing, food,

12 T okyo Updates: How Tokyo Can Become a “Circular City” as
Taught by the Edo Period (2022)

Chart 24

Municipal waste in kilograms per capita

United States

Germany

Netherlands

United Kingdom

Japan

800
750
700
650
600
550
500
450
400
350

00

02

04

06

08

10

12

14

16

18

20

20

20

20

20

20

20

20

20

20

20

20

300

Source: Waste - Municipal waste - OECD Data

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

Chart 25

Japan has the opportunity to unlock greater
value across all aspects of environmental, social,and governance performance
ESG performance (large and smaller companies combined)

Leading

Middling

Lagging behind

ESG and Engagement Opportunities

Where is Japan headed?

As outlined in Chapter 2, the establishment of the
Stewardship Code, one of the key pillars of an economic
revival plan initiated by then prime minister Shinzo Abe
in 2014, was a watershed in terms of changing how
institutional investors interact with the corporations
they invest in. One of the Code’s key elements is“constructive engagement with investee companies”
that institutional investors are asked to undertake tofoster sustainable growth.
More specifically, the Stewardship Code encourages
engagement between institutional investors (such as
asset managers) and investee companies in thefollowing ways:

Environmental

SocialGovernanceEuropeNorth America

Japan

Source: McKinsey analysis

Stakeholder capitalism and engagement
Similarly, Japan has had a culture of stakeholder
capitalism – putting people and the planet first in
corporate and economic policies – for centuries,
which has now been more firmly reinforced throughgovernment policies.

Japan’s industry has historicallydeveloped on a philosophy ofseeking to benefit not just oneself
but all three stakeholders, which
are the seller, the buyer and thecommunity, thereby contributing
to society.
Tokutaro Nakai,Vice Minister of the Ministry of the Environment• Asset	owners, such as pension funds, are asked tomonitor whether the asset managers investing on
their behalf carry out stewardship activities that are
in line with the asset owners’ policies, and the qualityof dialogue between asset managers and investee
companies is a key evaluation point.
• The	 code emphasises constructive engagement
between institutional investors and investee
companies to solve governance issues the latter
may be facing.
• Institutional	
investors tasked with passive management are encouraged to actively take charge ofengagement and voting (based on the premise that
passive management offers institutional investors
fewer options to sell investee companies’ shares andtherefore they are able to promote longer-term
corporate value growth).
How engagement leads to alphaEngagement has come into focus thanks to its positive
impact on all parties involved: asset owners, institutional
investors and investee companies. Academic researchshows engagement activity by large institutional investors
aimed at companies with potential areas of improvement,such as governance, low return on assets (ROA) andexcessive cash holdings, has had a positive impact ontarget companies. This has resulted in higher return on
equity (ROE), more independent directors and proportionof shares owned by management.
Within Japan’s changing landscape, we believe thatengagement is a significant source of differentiation.
In identifying undervalued names which have thepotential to enhance their value due to ESG-related
factors (Chart 26) engagement with these firms – on

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

petrol to power vehicles, but also to generate electricity.
Whilst hydrogen can be produced from fossil fuels, it canalso be extracted from water through electrolysis, using
electricity to split H2O into hydrogen and oxygen, which isa technology we expect to accelerate in the coming years.

Chart 26

Returns from ESG integration and engagement

High

Share PriceEngagement

Low

Return ofEngagement

Return on stock selection
on the back of ESG integration

External ESG Score (Fundamentals)

High

Source: Nikko AM

issues such as decarbonization, managing humancapital, and enhancing their governance frameworks –will improve their fundamentals, enhance their corporate
value and ultimately lead to higher returns.
More importantly though, engagement with Japanesecompanies can offer another dimension, by shining a
spotlight on hidden value. There is a strong case tosuggest that the ESG credentials of many Japanesecompanies are going unnoticed at the global level,
either because Japanese companies have reputationalor legacy issues to overcome, or that companies neglect
to make their ESG case as forcefully as they could.
Kawasaki Heavy Industries: engineering ahydrogen-­based society
Kawasaki Heavy Industries (Kawasaki) has a worldwide
reputation as a multinational industrial manufacturer ofmotorcycles, engines and heavy equipment. It doesn’t
have a reputation as being a provider of clean energy.
But after playing a role in helping Japan become anindustrial powerhouse in the 20th century, Kawasaki
Heavy has its sights set firmly on the 21st century with its
emphasis on hydrogen.
Hydrogen is expected to play a key role in plans for Japan
to become carbon neutral by 2050, as Japan reduces its
reliance on fossil fuels. Green hydrogen has been labelled‘the ultimate clean energy’, because it can be used likeBut since Japan does not possess the required natural
resources, nor have the space to build large-scale solar
farms for electrolysis, it will have to acquire hydrogenfrom Australia and the Middle East, which have abundantnatural resources, land and sunlight for solar farming.
Shipping hydrogen to Japan currently presents a big
technological challenge. It must be turned from gas into
liquid by cooling it to -253°C before it can be transported.
At a reduced volume, hydrogen storage, transportationand distribution efficiency increases dramatically.
From a value perspective, Kawasaki appears significantly
undervalued. It already has several years’ experience oftransporting and storing liquefied natural gas at
temperatures of -162°C. Kawasaki already possesses thestate-of-the-art technologies needed for the masstransportation of hydrogen that could transform Japan
into a hydrogen-led society. In April 2022, Japan’shydrogen association HySTRA announced the completionof the world’s first maritime transport of liquefied hydrogen, including its loading and unloading, in Kobe, Japan.13
Kawasaki is an example of a cutting-edge company
being judged on its legacy operations rather than its
future possibilities. From an engagement perspective,
it has not been able to fully articulate the scope of its
clean energy ambitions to the broader investmentcommunity, or to reposition itself away from its ‘heavy
industry’ reputation. In recognition of this, Kawasaki has
created a ‘Sustainability Promotion Department’ thatwill look to explain its clean energy initiatives morethoroughly.

13 H
 ySTRA celebrates completion of world’s first liquefied hydrogen
vessel voyage in Japan (2022)
References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Selected shades of hydrogen

GREEN
HYDROGEN

ColourGREY
HYDROGENBLUE
HYDROGEN

Process

SMR or gasification

SMR or gasification
with carbon capture(85-95%)Pyrolysis

Electrolysis

SourceMethane or coal

Methane or coal

MethaneRenewable
electricity

TURQUOISEHYDROGEN*

Note: SMR = steam methane reforming.
* Turquoise hydrogen is an emerging decarbonisation option.

Source: Green hydrogen: A guide to policy making (irena.org)

Snow Peak: a new model of the Japanese circular
economyAs societies adapt to life after the coronavirus pandemic,
some companies are rising to the challenge by offering newlifestyles for a post-pandemic world. One such company
is camping gear manufacturer Snow Peak. Already an
established outdoor brand with a global following, it istrying to evolve from a camping-focused enterprise intoa business providing “nature-oriented life values” to awide variety of individuals through many aspects of life.
Snow Peak sees social values being challenged by rapid
digitalisation and advances in technology and its statedsocial mission is “reviving humanity that has diminishedin modern society”, with clear echoes of the circular
economy instilled throughout the Edo era. For example,
Snow Peak’s values promote the following aspects of life:• 	Playing: Promoting camping as part of everyday life,
promoting local communities and strengthening
connections within the family and the workplace.
• 	Clothing: Developing clothing suited, in function anddesign, for both outdoor and everyday use, promoting
traditional craftsmanship and textile recycling, andconnecting consumers with local sustainable clothing
producers.
• 	Eating: Promoting the outdoor “off the grid” cooking
experience and encouraging locally available, organic

produce and traditional farming methods.
• 	Living: Offering nature-oriented lifestyle tips in urban
settings.
• 	Working: Improving the contemporary working
experience by introducing elements of nature – such as
remote working in the garden and using camping gear.
In an era of disposable goods and ‘fast fashion’ that has
raised ethical and sustainability concerns, Snow Peak’s
outdoor goods are ‘guaranteed for life’, and the company
promises to repair or replace any item that doesn’t live
up to the company’s standards. Specifically, the company
has built a business model that it claims has transcended
mass production and mass consumption by producing
products that are very high-spec and designed to be
repaired repeatedly instead of being discarded.
Despite these credentials, Snow Peak is a company with arelatively low ESG ratings, and therefore remains off theradar for ESG-focused investors. Deeper engagement withthe company suggests this is not a concern for the com­pany itself, and that by focusing on its core activities, andcontinuing to live its sustainability-driven values, it will beappreciated by its customers and, over time, by investors.

References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

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The Japan of today

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Unlocking Japan’s hidden value

Ajinomoto: solving the world’s nutritional andhealth crises
In addition to the global emphasis on reducing carbon
dioxide, cutting methane emissions is also essential toslowing the current pace of global warming. Methane’s
lifetime in the atmosphere is shorter than that of CO2,
but methane is said to be more than 25 times morepotent than CO2 in trapping heat within the atmosphere.14
As such, reducing methane emissions is critical to slow
global warming and presents an immediate opportunity
to tackle climate change.
The climate impact from the agricultural sector– particularly around meat and dairy farming – hasbeen known for decades, but the role of livestock in
the production of methane emissions has come underincreasing scrutiny in recent years. As Chart 27 shows,
agriculture is responsible for a significant portion of
global greenhouse gas (GHG) emissions, of which cattle
are the major contributor. The Food and Agriculture
Organization (FAO) also notes that cattle raised for bothbeef and milk production, as well as for inedible outputs
like manure and draft power, are major GHG emitters,
representing about 65% of the livestock sector’semissions.15
According to the US Department of Agriculture, theglobal population of cattle was estimated at one billion
in 2021. However, simply reducing cattle populations
would also cause a shortage in the supply of protein,
one of the three essential food groups, along withcarbohydrates and dietary fats. Plant-based proteinsoffer both an alternative to meat and a way to reduce
methane emissions.

ESG and Engagement Opportunities

Where is Japan headed?

extensive local presence. The company’s global stancealso reflects its key philosophy, established at the timeof its founding, of contributing to society by providing
the underprivileged with not only nourishment but an
enjoyable eating experience.
Ajinomoto was the first company to commercialise theuse of ‘umami’, also known as monosodium glutamate,a savoury taste which earned a place alongside sour,
sweet, bitter and salty. Seasonings with umami add ameaty richness to plant-based protein dishes, and havehelped improve the eating experience and nutritionalbalance of consumers for whom meat is a luxury.
However, Ajinomoto’s work, and contribution to society,is not just limited to seasoning. It is also a leader in
identifying and solving health issues associated withdietary practices.
Excessive salt consumption is known to cause significant
health problems, such as stroke, heart disease, osteo­
porosis and cancer, and is estimated to have become aserious health issue in more than 95% of countries
around the world. Studies have shown that replacing
salt with umami seasoning delivers significant healthbenefits, while the amino acids found in umami could
help the elderly by preventing some of the negative
effects of Ageing.

Chart 27

Global GHG emissions by economic sector

The Ajinomoto Group (Ajinomoto) is playing a significant
role in providing plant-based protein to consumers
around the world. The food producer was founded in1909 and has traditionally focused on developing its
business in agriculture-producing countries. Today,
Ajinomoto competes globally with rivals such as Nestléand Unilever, and is a leading player in developing
regions such as Africa, where it has established an

14 https://www.epa.gov/gmi/importance-methane

49 GT CO2 conversion (2010)
Electricity andheat production
25%
Other energy
10%sourcesIndustries
21%
Transportation
14%
6%
Architecture
Agriculture/Forestry/
Other land Use(AFOLU)
24%
Note: Gt = billion metric ton

15 https://www.fao.org/news/story/en/item/197623/icode/
References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

Source: Mizuho Securities Equity Research, based on IPCC AR5Working Group 3 Report

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The Japan of today

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Chart 28

How ammonia is used around the world (as at 2012)
Urea
55%(8,4% of urea
used industrially)
Ammonium phosphate 7%
Ammonium nitrate
12%
Ammonium sulfate/composite
13%
Direct use
3%
Industrial use
10%
Fertiliser-related use

Source: T he Institute of Energy Economics, Japan and NEXANT
data compiled by Nikko AM

Also, Ajinomoto’s expertise in the field of amino acids
can also be used in areas such as ammonia production.
Ajinomoto is working to develop a method to produce
ammonia in its amino acid production facilities, thiswould enable it to make small-scale ‘green’ ammonia for
local consumption, leaving a much smaller carbon
footprint compared to current large-scale and capital-­intensive ammonia production methods.
Ammonia is considered an important potential source of‘next generation’ energy. As with fossil fuels, ammonia is

ESG and Engagement Opportunities

Where is Japan headed?

both a chemical energy store and a fuel, where energy isreleased by the breaking and making of chemicalbonds. However, compared to hydrogen, ammonia
liquefies at a more manageable minus -33°C and istherefore much easier to store and transport. Ammonia
is also a very widely used chemical (Chart 28) with thestorage and transportation infrastructure already in place.
Ammonia is expected to be used extensively as an
early-stage alternative to hydrogen, until the technology
and infrastructure for the effective transportation ofhydrogen matures.
Are investors fully pricing in climate change risks
and opportunities?
While investors are increasingly aware of climate change,
the evidence suggests the market is not yet capable offully pricing in risks and opportunities resulting fromclimate change. According to estimates released by
Japan’s Government Pension Investment Fund (GPIF),
under a scenario in which global warming is held at
1.5°C above pre-industrial levels, the CVaR (Climate
Value-at-Risk, which measures the potential impact ofclimate change on corporate and security values) forJapanese equity is positive at 0.6%, compared to -11.4%

References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

Chart 29

Japanese companies dominating decarbonising technologies
Rank Company

Key technologies

1

Toyota Motor (Japan)

Fuel cell EVs, hydrogen infrastructure, EVs

2

General Electric (US)

Geologic carbon sequestration, high efficiency thermal power generation3

Mitsubishi Heavy Industries (Japan)

CO2-absorbing materials, high efficiency thermal power generation

4

Siemens (Germany)

Hydrogen/ammonia power generation, wind power generation

5

Hyundai Motor (South Korea)

Fuel cell EVs, hydrogen infrastructure6

Hitachi (Japan)

Industrial machinery electrification, power semiconductors

7

Toshiba (Japan)

CO2-absorbing materials, hydro power generation

8

ExxonMobil (US)CO2-absorbing materials

9

Honda Motor (Japan)

Fuel cell EVs, hydrogen infrastructure, EVs

10

Honeywell International (US)CFC (chlorofluorocarbon) reclamation

Source: Nikkei

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

for foreign equity. This predicted outcome is a result ofpatent competitiveness in the automobile, energy supply
and chemicals sectors. It means that collectively, there
may be more opportunities than risks for Japanesecompanies as the world moves towards net zero.
Reaching the 1.5°C target is far from a forgone conclusion;
the risk that we overshoot exists and makes the focus
on cleaner sources of energy as important as ever.
In a separate study conducted by data analytics firm
astamuse, Japanese companies dominate the rankingsfor key decarbonising technologies, including hydrogen,carbon capturing and electric vehicles (EV) (Chart 29).
As countries across the world increase their efforts
towards achieving net zero targets, it is likely that newmarkets will be created that leverage these advanced
technologies, meaning investors will start pricing inthese opportunities into stock prices. Therefore, skilled
active investors will have opportunities to profit fromthe market inefficiency as additional climate related
disclosure will not only shed light on the additional risks
but also on opportunities that can contribute towards
creating long-term value.
Summary
The growing importance of ESG and social responsibility
is an opportunity to identify hidden value in firms thatare willing to tackle and resolve social issues. Moreover,the shift toward a decarbonised, more sustainable society
is creating growth opportunities for companies withenvironmentally friendly technologies, especially in clean
energy solutions. However, while companies everywhere
are keen to demonstrate their ESG credentials, very few
companies are capable of making a meaningful difference
to the future direction of the world.

ESG and Engagement Opportunities

Where is Japan headed?

Key chapter points• 	Japan has a long-standing circular economy
heritage and ingrained culture of using limited
resources effectively. This is evidenced in theway that traditional companies have pivoted
from traditional practices to find innovative
solutions to modern challenges.
• 	Companies like Kawasaki Heavy and Ajinomoto
are at the forefront of the clean energy transition,by prioritising the secure production, storage
and transfer of hydrogen and ammonia. While
Snow Peak is continuing to affirm the principles
introduced by Japan’s Eco-era circular economy.
• 	While there’s still room for improvement, active
engagement is already helping some Japanesecompanies to better articulate their current ESG
activities, while encouraging others to drive
new initiatives forward, thereby unlocking
further investment value.
Chapter 5 focuses on where Japan is headed overthe next 5-10 years, its role in helping the world toreach net zero targets, and some of the key issues
concerning Japanese equities that investors
should consider.

While companies such as Kawasaki and Ajinomoto
possess the technology, the know-how and the resolve
to drive this change, the technologies themselves areeither still intangible – and yet to be represented in data
– or are still experimental and not recognised as thesecompany’s main source of profits. It is therefore understandable that global investors, even those with an ESGlens – are still overlooking such businesses. But thesehidden value companies, driven by a combination ofproblem-solving innovative and deep-rooted sustain­
ability principles, deserve a closer look.
References to individual stocks are for illustration purposes only and do
not constitute a recommendation to buy or sell.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Where is Japan
headed?
Chapter 5
Shigeru Aoyagi
Team Leader and Portfolio Manager for the Japan Value Strategy
at Nikko Asset Management

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Where is Japan headed?
Following the bursting of Japan’s 1980’s equity
bubble, I have personally witnessed the manychanges and challenges faced by the Japanese
economy.
Japan’s economic downturn was so long that excessive
pessimism prevailed, and its stock market has cheapened
to levels rarely seen in other parts of the world. The shareprices of many Japanese companies are at a discountalthough they possess attractive products, technologicalcapabilities, and content.
Japan as a solutions provider
It has already been 30 years since Japan’s growth peaked,
with the economy shifting to its maturity phase. During
this phase, many innovations – all of which are top
notch globally – have been created to solve the social
issues that have arisen. These innovations include: robot
technology and environmental technology to supplement
labour shortages; the world’s leading hydrogen value
chain; power devices that contribute to power saving
and CO2 reduction of components in the electrification
era by freely controlling current, voltage and frequency;
and media and entertainment content tremendously
popular with global youth. We are confident that these
innovations will be in demand amid the challenges thatthe world will face in the future and therefore will bemonetised in many situations.
In the early 2000s, “Japanification” was a widely used
expression, serving as a warning of what not to become.
Time has passed and the global economy is losing
momentum and gradually running out of new frontiers.
Many countries and regions are facing some of the
difficulties Japan experienced in the past as side
effects of growth, including falling birth rates, declining
working-­age populations, harmful effects of urbani­
sation, and environmental threats. Having dealt withthese issues earlier, Japan is positioned to provide clues
to others who are now looking to solve these problems,
and to also capture their demand. We are strongly
convinced that due to the cash flow created by thesedrivers, the Japanese stock market will surpass the
Nikkei’s record high of 38,915 points set 30 years ago,
in the near future.

Positioned for new geopolitical and economic realities
Recent developments such as the COVID-19 pandemic
and the Russia-Ukraine conflict, have threatened tooverturn existing global structures. The pandemic
divided the world, challenging the concept of social
convenience and efficiency based on borderlessglobalisation, and drastically changed the way we live.
The Russia-Ukraine conflict also highlighted the existenceof camps whose values differ from those of what can beconsidered the established structure. Some countries andregions that rely on natural resources for their national
revenues and have no other industrial base, or who
believe that top-down controls and regulations areneeded to maintain their social systems, likely favour
such values. The struggle between differing sets of values
will be prolonged, in our view. Instead of a borderlessand globalised economy, we may consider the possibilityof a completely contrasting development. Security risks
may promote armament and energy-related infra­
structure investment at the national and regional levels.
At the civilian level, these risks may create incentives todeliberately invest and build production activities andinformation infrastructure within a limited area; they
may also promote research and development in clean
energy, such as hydrogen, to replace fossil fuels.
Rising inflation can prompt companies to reduce
intermediate costs such as those related to energy anddistribution networks and relocate their production
bases; it can also encourage consumers to move to areas
where the cost of living is cheaper. Within such a shift toa “local production for local consumption” type economy
and increasing global divisions, free trade and expansive
economic partnerships that utilise regional alliances are
expected to play an important role. We expect suchdevelopments to accelerate in the future.
A conduit to Asian growth
There are various intra-regional alliances in the world,
including those currently under negotiation. The PacificRim, in particular, boasts a significant number of
intra-­regional alliances based on high levels of cultural
standards and trust. The ASEAN encompasses a popu­
lation of over 600 million and has abundant mineral
resources and a sophisticated production infrastructure;
the 12 countries that are expected to participate in theTrans-Pacific Partnership (TPP) make up 40% of the global
economy; the Quadrilateral Security Dialogue, known as
Quad, is a framework for security and economic cooperation between Japan, the US, Australia, and India – home

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

to a huge population, wealth of natural resources, andextensive industrial power. Japan has the geographicaladvantage of being able to access, as well as serve as ahub, to any of these alliances.
In addition, China’s economy has entered a more maturephase, with focus shifting to the services sector as thecountry faces the structural challenges of a rapidly
ageing population. The Cross-Border Interbank Payment
system (CIPS) for renminbi transactions has received
attention, as China’s goal is to make the currency
settlement system the new de facto in the wake of theRussia-Ukraine conflict. But if CIPS it is to replace existing
networks such as SWIFT, a certain amount of confidence
in the renminbi will be required; as such, actions thatfavour the country’s terms of trade will be subject tomajor restrictions. Going forward, the Chinese economy
is expected to affect the world economy as an inflation
factor rather than a deflationary one. This could be an
important turning point for neighbouring Japan as its
terms of trade – in addition to the relative competitiveness of its labour force and goods and services – will
improve for the first time in a long time.

ESG and Engagement Opportunities

Where is Japan headed?

Many of the current events impacting society also
represent business opportunities borne from thetransformation of economic structures – and we believe
Japan has a critical role to play. Japan’s own growthpotential is limited, and the country still faces challenges.
However, after overcoming many difficulties, I believe
Japan has finally reached the light at the end of thetunnel. As an asset manager, nothing would be moresatisfying than to see investors view Japan as a valuable
presence within their portfolios that enables them togreatly capture growth opportunities across the wider
Asia Pacific region.

As an asset manager, nothing would
be more satisfying than to see
investors view Japan as a valuable
presence within their portfolios thatenables them to greatly capture
growth opportunities across thewider Asia Pacific region.
Shigeru Aoyagi,
Team Leader and Portfolio Manager for the Japan Value Strategy
at Nikko Asset Management

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Important
Information

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

ESG and Engagement Opportunities

Where is Japan headed?

Important Information
This document is prepared by Nikko Asset Management
Co., Ltd. and/or its affiliates (Nikko AM) and is for
distribution only under such circumstances as may bepermitted by applicable laws. This document does notconstitute personal investment advice or a personal
recommendation and it does not consider in any way
the objectives, financial situation or needs of any
recipients. All recipients are recommended to consult
with their independent tax, financial and legal advisers
prior to any investment.

United Kingdom and Europe: This document iscommunicated by Nikko Asset Management Europe Ltd(Nikko AME), which is authorised and regulated in the
United Kingdom by the Financial Conduct Authority(the FCA) (FRN 122084). This document constitutes afinancial promotion for the purposes of the Financial
Services and Markets Act 2000 (as amended) (FSMA) andthe rules of the FCA in the United Kingdom, and isdirected at professional clients as defined in the FCA
Handbook of Rules and Guidance.

This document is for information purposes only and is
not intended to be an offer, or a solicitation of an offer,to buy or sell any investments or participate in any
trading strategy. Moreover, the information in thisdocument will not affect Nikko AM’s investment strategy
in any way. The information and opinions in thisdocument have been derived from or reached fromsources believed in good faith to be reliable but havenot been independently verified. Nikko AM makes noguarantee, representation or warranty, express or
implied, and accepts no responsibility or liability for theaccuracy or completeness of this document. No relianceshould be placed on any assumptions, forecasts,
projections, estimates or prospects contained within
this document. This document should not be regarded
by recipients as a substitute for the exercise of their own
judgment. Opinions stated in this document may
change without notice.

United States: This document may not be duplicated,
quoted, discussed or otherwise shared without priorconsent. Any offering or distribution of a Fund in the
United States may only be conducted via a licensed andregistered broker-dealer or a duly qualified entity. Nikko
Asset Management Americas, Inc. is a United States
Registered Investment Adviser.

In any investment, past performance is neither anindication nor guarantee of future performance and aloss of capital may occur. Estimates of future performanceare based on assumptions that may not be realised.
Investors should be able to withstand the loss of any
principal investment. The mention of individual securities,
sectors, regions or countries within this document does
not imply a recommendation to buy or sell.
Nikko AM accepts no liability whatsoever for any loss ordamage of any kind arising out of the use of all or any
part of this document, provided that nothing herein
excludes or restricts any liability of Nikko AM underapplicable regulatory rules or requirements.
All information contained in this document is solely
for the attention and use of the intended recipients.
Any use beyond that intended by Nikko AM is strictly
prohibited.

Singapore: This document is for information to
insti­tutional investors as defined in the Securities andFutures Act (Chapter 289), and intermediaries only.
Nikko Asset Management Asia Limited (Co. Reg.
No. 198202562H) is regulated by the Monetary Authorityof Singapore.
Hong Kong: This document is for information toprofessional investors as defined in the Securities
and Futures Ordinance, and intermediaries only.
The contents of this document have not been reviewed
by the Securities and Futures Commission or any
regulatory authority in Hong Kong. Nikko AssetManagement Hong Kong Limited is a licensed
corporation in Hong Kong.
New Zealand: This document is issued in New Zealandby Nikko Asset Management New Zealand Limited(Company No. 606057, FSP22562). It is for the use ofwholesale clients, researchers, licensed financial advisers
and their authorised representatives only.
Kingdom of Bahrain: The document has not been
approved by the Central Bank of Bahrain which takes
no responsibility for its contents. No offer to the public
to purchase the Strategy will be made in the Kingdomof Bahrain and this document is intended to be read by
the addressee only and must not be passed to, issued
to, or shown to the public generally.

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The Japan of today

Japan’s new corporate climate

Unlocking Japan’s hidden value

Kuwait: This document is not for general circulation to
the public in Kuwait. The Strategy has not been licensed
for offering in Kuwait by the Kuwaiti Capital Markets
Authority or any other relevant Kuwaiti government
agency. The offering of the Strategy in Kuwait on thebasis a private placement or public offering is, therefore,
restricted in accordance with Decree Law No. 7 of 2010
and the bylaws thereto (as amended). No private or
public offering of the Strategy is being made in Kuwait,
and no agreement relating to the sale of the Strategy
will be concluded in Kuwait. No marketing or solicitation
or inducement activities are being used to offer ormarket the Strategy in Kuwait.
Kingdom of Saudi Arabia: This document is communicated by Nikko Asset Management Europe Ltd, which isauthorised and regulated by the Financial Services andMarkets Act 2000 (as amended) (FSMA) and the rules of
the Financial Conduct Authority (the FCA) in the United
Kingdom (the FCA Rules). This document should not be
reproduced, redistributed, or sent directly or indirectly
to any other party or published in full or in part for any
purpose whatsoever without a prior written permission
from Nikko AME.
This document does not constitute investment advice
or a personal recommendation and does not consider inany way the suitability or appropriateness of the subject
matter for the individual circumstances of any recipient.
In providing a person with this document, Nikko AME is
not treating that person as a client for the purposes of
the FCA Rules other than those relating to financial
promotion and that person will not therefore benefit fromany protections that would be available to such clients.
Nikko AME and its associates and/or its or their officers,
directors or employees may have or have had positions
or material interests, may at any time make purchases
and/or sales as principal or agent, may provide or haveprovided corporate finance services to issuers or may
provide or have provided significant advice or investment
services in any investments referred to in this document
or in related investments. Relevant confidential infor­
mation, if any, known within any company in the Nikko
AM group or Sumitomo Mitsui Trust Holdings group andnot available to Nikko AME because of regulations orinternal procedure is not reflected in this document.
The investments mentioned in this document may not
be eligible for sale in some states or countries, and they
may not be suitable for all types of investors.

ESG and Engagement Opportunities

Where is Japan headed?

Oman: The information contained in this document
nether constitutes a public offer of securities in the
Sultanate of Oman as contemplated by the Commercial
companies law of Oman (Royal decree 4/74) or the
Capital Markets Law of Oman (Royal Decree80/98,
nor does it constitute an offer to sell, or the solicitationof any offer to buy non-Omani securities in the Sultanateof Oman as contemplated by Article 139 of the Executive
Regulations to the Capital Market law (issued by Decision
No. 1/2009). This document is not intended to lead tothe conclusion of any contract of whatsoever nature
within the territory of the Sultanate of Oman.
Qatar (excluding QFC): The Strategies are only being
offered to a limited number of investors who are willing
and able to conduct an independent investigation of
the risks involved in an investment in such Strategies.
The document does not constitute an offer to the
public and should not be reproduced, redistributed, orsent directly or indirectly to any other party or publishedin full or in part for any purpose whatsoever without aprior written permission from Nikko Asset Management
Europe Ltd. No transaction will be concluded in yourjurisdiction and any inquiries regarding the Strategies
should be made to Nikko AME.
United Arab Emirates (excluding DIFC): This document
and the information contained herein, do not constitute,and is not intended to constitute, a public offer of
securities in the United Arab Emirates and accordingly
should not be construed as such. The Strategy is only
being offered to a limited number of investors in the UAE
who are (a) willing and able to conduct an independent
investigation of the risks involved in an investment insuch Strategy, and (b) upon their specific request.
The Strategy has not been approved by or licensed orregistered with the UAE Central Bank, the Securities
and Commodities Authority or any other relevant
licensing authorities or governmental agencies in the
UAE. This document is for the use of the named
addressee only and should not be given or shown to
any other person (other than employees, agents or
consultants in connection with the addressee’s
consideration thereof).
No transaction will be concluded in the UAE and any
inquiries regarding the Strategy should be made to
Nikko Asset Management Europe Ltd.

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About Nikko Asset Management
With US$219 billion* under management,
Nikko Asset Management is one of Asia’s largest asset
managers, providing high-conviction, active fundmanagement across a range of equity, fixed income,multi-asset and alternative strategies. In addition, its
complementary range of passive strategies covers morethan 20 indices and includes some of Asia’s leadingexchange-traded funds (ETFs).
Headquartered in Tokyo since 1959, Nikko AssetManagement and its subsidiaries employ personnel
representing 25 nationalities, including 205 investment
professionals. The firm has a presence through subsidiaries or affiliates in a total of 11 countries and regions.
More than 400 banks, brokers, financial advisors and life
insurance companies around the world distribute thefirm’s products.

The investment teams benefit from a unique global
perspective complemented by the firm’s historic AsianDNA, striving to deliver consistent excellence inperformance. The firm also prides itself on its progressive,
solution-driven approach, which has led to many
innovative funds launched for its clients.
For more information about Nikko Asset Management
and to access its investment insights, please visit thefirm’s homepage.

* C onsolidated assets under management and sub-advisory of
Nikko Asset Management and its subsidiaries as of 30 June 2023.