[2024 Financial Forum] "Japanese Companies' Value-Up is Half Success... Challenge to Expand Capital Efficiency"

Frank Benjimeura, Head of Asia Equity at Soci?t? G?n?rale, attended the '2024 Asia Financial Forum' held on the 9th at the Chosun Hotel in Jung-gu, Seoul, and gave a lecture on the topic of 'Evaluation of the Japanese Corporate Value-Up Program.' Photo by Jinhyung Kang aymsdream@

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Frank Benzimra, Head of Asia Equity Strategy at Soci?t? G?n?rale, evaluated Japan's corporate value-up program conducted so far as a "half success," stating that "there remains the challenge of improving capital efficiency."

At the '2024 Asia Financial Forum' held on the 9th at the Westin Chosun Hotel in Jung-gu, Seoul, Head Benzimra said, "The capital efficiency (return on equity minus cost of equity) of Japanese listed companies has recovered from its lowest point during the COVID-19 pandemic and currently exceeds 4.5%, a level similar to that of Eurozone listed stocks." However, he explained, "This is still lower than the U.S., so more measures are needed to increase profitability and reduce the cost of equity." Capital efficiency is an indicator showing how well a company utilizes capital provided by shareholders or creditors to generate profits.

He expressed that expanding leverage, improving asset efficiency, and increasing dividends are necessary for this. Although there have been significant improvements through the corporate value-up program so far, Japanese companies still traditionally tend to hold a lot of cash and are passive in dividends or share buybacks. He suggested that efforts to expand capital efficiency should be as active as corporate governance improvements.

Head Benzimra mentioned that Japan's current 'reflation' (a phenomenon where prices gradually rebound after a long period of stagnation) was possible due to structural reforms, including corporate governance improvements. He classified Japan's stock market situation as the 'bubble period' from the 1980s to the early 1990s, the 'lost 20 years period' from the early 1990s to the end of 2012, and the 'reflation period' thereafter. During the bubble period when Japan's economy was booming, TOPIX rose by 26.6%, fell by 4.6% during the full-scale recession period, and rebounded by 14.3% from 2013 onward.

He particularly emphasized that reflation is the result of a 'growth strategy' combining Japan's accommodative monetary policy, fiscal policy, and structural reforms such as corporate governance. Thanks to this, Japan's nominal GDP, which had been declining, increased to nearly 600 trillion yen.

While the market often views the starting point of Japan's stock market boom as 2023, when the value-up system was fully launched, or 2014, when the Stewardship Code was introduced, he said, "Attempts to improve corporate governance in Japan have a fairly long history," tracing back to 1997. Head Benzimra highlighted that in the late 1990s during the Asian financial crisis, questions were raised about the 'main bank system' (a bank-centered funding and corporate monitoring system), and various systems related to enhancing corporate value, such as the introduction of the Government Pension Investment Fund (GPIF), were implemented thereafter.

He went on to mention the 'Ito Review' report, announced as part of Abenomics' 'third arrow' growth strategy and structural reforms to attract global investors, the adoption of the Stewardship Code in 2014, and the introduction of the Corporate Governance Code in 2015 containing principles on corporate governance, explaining, "these were behavioral guidelines actively embraced within the private sector, including institutional investors and the business community."

Head Benzimra pointed out that Japan's corporate value-up system suggests the possibility of reform in the corporate sector for Korea. He said, "I heard that the Korean government decided to fully introduce a corporate value-up program earlier this year," comparing Korea and Japan. He noted, "Looking at various data related to value-up, Korea has been doing quite well in terms of PBR (price-to-book ratio) over the past year," and advised, "Then we need to consider what more should be done going forward."

He especially emphasized that value-up should be viewed with a long-term perspective. Head Benzimra added, "There was almost a 10-year gap between the first version of the Stewardship Code (2014) and the Tokyo Stock Exchange's market reform (2023)." The principles initially focused only on stocks evolved over time to apply to various assets such as bonds.

However, Head Benzimra pointed out differences with Japan, noting that Korea does not legally regard banking as a single industry sector and that the Securities Exchange Act differs significantly from Japan's. He explained, "I understand that the way minority shareholders are managed is very different from Japan," and said, "To successfully implement corporate value-up in Korea, various tools will be needed, and a different approach from Japan's is required."

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