Goldman sees ‘revolutionary’ shift in Japan Inc

Japanese corporates are notorious for hoarding cash, but there`s a revolutionary shift underway, with shareholder returns set to reach their highest level ever this fiscal year, according to Goldman Sachs.

“Faced with growing pressure to improve capital efficiency, Japanese companies have become increasingly conscious of corporate governance and the need to deliver higher returns to shareholders as their earnings have recovered,” Goldman Sachs wrote in a note published over the weekend.

Annual dividends are forecast to reach a record high of 9 trillion yen (USD 76 billion) in the fiscal year ending March 31, up from 8 trillion yen last year. Japanese companies have announced share buybacks totaling 2.5 trillion yen between April and December 2014, up 116 percent on year.

A corporate sector that is more proactive about shareholder returns is “quite revolutionary in Japan`s context,” Kathy Matsui, managing director and chief Japan strategist at Goldman Sachs, said in an interview with CNBC on Monday.

The government, under Prime Minister Shinzo Abe, has taken it upon itself to drive a shift in corporate behavior. Corporate governance reform is a part of the so-called “third arrow” of Abenomics – Abe`s three-pronged strategy to revive the economy – alongside other a host of structural reforms including increasing labor market flexibility and opening up the agricultural sector to foreign competition.

In January 2014, the JPX-Nikkei 400, dubbed the “shame index,” was launched by the Japan Exchange Group and Nikkei, receiving endorsement from the Government Pension Investment Fund (GPIF) soon after.

The index, reportedly the brainchild of the ruling Liberal Democratic Party, is unique in that stock selection criteria emphasize high return on equity (ROE) and good governance. The GPIF, which manages around USD 1.1 trillion, has adopted the index as a benchmark for some of its domestic equity portfolios.

In February 2014, the Japanese Stewardship Code – new government guidelines on shareholders` involvement in the firms- was introduced. The new guidelines are designed to encourage shareholders to challenge executives on issues such as low dividend payouts and a lack of independent directors. Later this year, a new “corporate governance code” will be rolled out to establish best practices for governance behavior. A key focus area of will be the role of board of directors.

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