Foreigners surge into Japanese shares

Overseas investors have raised their share of corporate Japan to a record high, potentially intensifying the influence of western-style capitalism in a country still resistant to shareholder activism.

International investors increased their stake in the stock market to 28 per cent in March from just over 26 per cent in 2006 and only 4.7 per cent in 1990, according to figures released by the Tokyo Stock Exchange and four smaller Japanese bourses.

Investors are gambling on Japan’s economic recovery and a rebound in underperforming shares. Some funds have also bought Japanese stocks in the hope of squeezing out higher dividends and pushing management to improve its return on equity.

Analysts said the rise in foreign share ownership reflected expectations that western shareholder culture would take root – and made it more likely tohappen.

Patrick Mohr, director of equity research at Nikko Citigroup, said foreigners had bought Japanese shares because of hopes about a consumer-led economic recovery, a rise in the prices companies can charge, and the prospects of shareholder activism. “It may be only the third one – expectations for activism – that shows any sign of igniting,” he said.

Andrew Hunter, co-head of Japan equities at UBS, said: “It goes without saying that, with rising overseas ownership, shareholders’ expectations of management priorities will move towards the international model.” This included “a greater focus on dividend payments”.

An activist hedge fund manager in Tokyo said: “Some of the domestic asset managers are reluctant to support foreign activists against a Japanese management team. In that sense having foreign shareholders is better.”

He added: “If an activist investor wants to make proposals to help a company realise its intrinsic value, foreign shareholders might be more sympathetic when deciding how to vote.”

The share of Japan’s market capitalisation held by foreigners rose mainly at the expense of retail investors, whose holdings dropped by 1 percentage point to 18.1 per cent, close to a record low.

International buying has propped up a market hit by tepid interest from domestic investors. Sectors most favoured by foreigners in the 12 months to March included property and shipping, where share prices soared.

Weekly figures released by the Finance Ministry suggest foreign ownership may have increased even further since the spring. Mr Hunter said over the past year or so, “the noticeable change is that we’re seeing a significant pick-up in interest from value investors”. These included controversial foreign activist funds such as Steel Partners, now in a battle to take over Bull-Dog Sauce.

The Nikkei 225 has risen 13 per cent since January last year. By several measures, however, such as price-earnings ratios, the Japanese market is still expensive compared with rivals.

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