I was reading this piece from value house Verdad titled: Diverging Destinies in Corporate Japan
I thought what is shared is interesting for my colleagues Isaac Ong and Choon Siong. Not everyone is interesting in these nerdy stuff but if I got the time, it is good to do some work. Not many would realized that there are some stock market reforms that is currently translating to some real performance improvement in Japan equities these past year.
Japan has undertaken significant structural corporate reforms in recent years. These include enhanced listing criteria by the Tokyo Stock Exchange (asking listed companies to increase their price-to-book (P/B) ratios, to boost capital efficiency and profitability). The call for improved capital efficiency has led to a focus on boosting shareholder returns, and record share buybacks in 2023. Returns on equity (ROE) and P/B ratios have increased following these reforms. – LSEG
Saying is one thing but some of the companies in Japan are really taking actions. For too many years, there are companies that trade at below their book value, holding a lot of cash and all of this keeps the return on equity low.
Countries are looking over at the USA and their stock market with a different eye. Perhaps a vibrant stock market has some other uses.
This may be a reason for Singapore to study how to revitalize their market (see… they are usually slow to this. Have to wait for others to do it then get ideas from them. Cannot come up with ideas themselves or their ideas end up quite jialat.)
Naoki explains that Verdad decided to use natural language processing to look through all the listed company’s official disclosures as well as use Chat GPT4 to look at linked materials on relevant sites for what they say about enhancing shareholder value.
For analytical consistency, we considered only those plans that specified a measurable target—such as raising the dividend payout ratio from 30% to 50% for the next year, repurchasing shares worth ¥10 billion in the next three years, or reducing cross-shareholdings to 10% of net assets within five years—as tangible. By contrast, we classified generic or open-ended statements—such as maintaining stable dividends, repurchasing shares “as necessary,” or making efforts to reduce cross-shareholdings—under vague commitments.
The chart below illustrates how differences in the actions taken by companies with a P/B ratio below 1.0 affected their stock performance over the two years following the TSE’s request:
We can see that there is some correlation between the share performance and the degree of written disclosures that they have put out.
Now, there are companies with much cash and long term investments with cross-holdings on their balance sheets. If they are able to execute on what they say, then they would realize a lot of value. And markets being forward-looking would accord these companies with higher value today.
Verdad did the same as before but separate the companies where their cash and long term investments are less or more than their market cap.
We can see a real difference.
I guess the biggest opportunity is if they can reduce the cross-holdings. In the local context, companies like Jardine Matheson may come to mind.
The Value and Small Factor is Most Visible in Japan Stock Markets
This Japan reform means that investors (long before this post) would benefit from finding companies whose balance sheet strength show more value than where they are trading at.
If we can systematically buy cheaper companies based on these metrics, we would do well. Granted these are not the traditional low-PE, low-PTB metrics. You do have to examine companies deeper after the initial screen.
I thought why not take time to review how the Japan markets have perform.
I have quite a few different slices of data about the Japan stock market from 1999 to 2025 (25 years) but I thought lets also see how they have perform in the past ten years. I also included some Dimensional research indexes (which we cannot invest in. You can look at them as if they run the same strategy last time, how would the performance be):
Compare to the MSCI World, the compounded returns of Japanese stocks are more muted.
For the same 25-year period, the MSCI World Index did 6.34% p.a. on an annualized basis and 402% cumulative. so MSCI Blend of 3.8% and 167% is much lower. If you invest in the small and medium companies (SMID), its closer with 5.2% p.a. and 273%. If you go for Japan small cap, its 5.5% p.a. and 306%.
The smaller companies is higher return.
You can equal the performance of the MSCI World if you invest in the cheaper stock SMID and Small cap stocks.
In fact, the MSCI Small Value did 7.4% p.a. and 415% which is better than the MSCI World.
The last 10 years have been more challenging, but we can generally see value stocks to be doing better than the blend for each size category.
The Dimensional research indexes look damn steroid but the only Dimensional fund in Japan happens to be in the US and it is doing 5.8% p.a. for the past 10 years. The fund is incepted in 1986, before the Japan crash for 30 years. Since incepted the fund in1986, the fund did 5.2% p.a. over the past 39 years. I think that is pretty not bad considering folks keep saying had you invest in Japan at a high, you would only be making money just recently!
Could we do better with blended?
WisdomTree has a Japan SmallCap Dividend Fund (DFJ) that is incepted in 2006. The 10 year performance over the same period is about 6.1% p.a., which is above the 5.9% p.a. for MSCI Small Cap Value from 2015 to 2025.
I discovered a LSV Asset Management with a Japan Small Cap Value with the following performance:
Time period is slightly different but damn solid if you ask me but this fund is small (106 million Yen)
Doing small cap value in Japan is few and far between.
The Avantis Global Small Cap Value UCITS Fund (AVGS) has 11% of the weighting in Japan. It will be pretty decent if you want a systematic strategy that has exposure to UK and Japan small cap value aside from the US one.
Ultimately, the point might not be that small cap value will always do better but it gives you an opportunity to. For those folks who has a crystal ball, they would have invested patiently in Nvidia in 2013 before all the crazy climb and be able to FI with Nvidia.
But not all of us can have crystal ball and there is every chance in 1999 that Japan will do decently well and while it didn’t (3.8% p.a. over 25 years), tilting towards smaller and cheaper companies give a probable chance that it may.
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