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A PUBLICATION FROM REDMAYNE BENTLEY

SPRING 2022

JAPAN: THE RISING SUN

WITH AGE COMES WISDOM Japan’s Ageing Population

SONY The Great Innovation Race

ONE PARTY STATE A History of Japanese Democracy

JAPAN Economic Reform and Innovation

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CONTENTS

THE RISING SUN INTRODUCTION

2

The Rising Sun

WITH AGE COMES WISDOM

4

Japan’s Ageing Population

SONY

6

The Great Innovation Race

ONE PARTY STATE

8

A History of Japan’s Democracy

JAPAN

10

Economic Reform and Innovation

A BRIEF HISTORY OF JAPAN

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JAPAN UPDATE

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JAMES ROWBURY | INVESTMENT RESEARCH LEAD

Japan has always done things differently. A cultural antithesis to the West and about as far as you can travel around the globe before heading back to the UK. Home to some extraordinary inventions and a hive of creativity, Japan has given the world Pokémon, Sushi, and mass-market video games. Though, despite its innovative qualities, Japanese business has somewhat struggled to keep pace as the world around it progresses. Its stock market has grown by little over 40% of its global counterparts in the last decade, offering little incentive to UK investors looking to create value for their portfolios.

Ok, this is a rather simplistic assessment, and the reality has been a different story for the savvier stock-picker. It is perhaps unwise to generalise an entire investment universe under one banner, most pertinent for Japan and its vast and fragmented business environment.

On the one hand, the country has a raft of long-standing and familyowned businesses with steady cash flows, but that are poorly managed and unmotivated to reinvest profits for growth. On the contrary, there remains a culture of innovation across all industries and some world-leading brands (See Sony: The Great Innovation Race) in niche sectors.

Take LITALICO for example, a company that has developed welfare and educational software to address the country’s social care crisis, or Jeol, which started life in the 1930s making microscopes for scientific research, but today has leveraged this expertise to build world-leading lithography lenses for building semi-conductors, the lifeblood of our ever-more connected world.

Though these are diamonds in the rough thanks to a lack of independent research on Japanese stocks. A robust active strategy is required to reap the rewards on offer.

Economics is where Japan’s uniqueness is most prevalent. While most developed economies have grappled with the conundrum of persistently low interest rates since the global financial crisis, Japan has been experimenting with such policy for decades… and it made it work.

It seems to have sidestepped our inflationary headwinds too, taking much of its energy imports from its neighbouring Asian states, as opposed to a warring Europe. Furthermore, its focus on manufacturing automation has led to a cheap manufacturing base.

Though, all being said, Japan’s lack of inflation (and sometimes deflation) has proved problematic over the last decade, with its ageing population dragging on the state’s economy. To put it simply, retirees spend less, but require more state-funded social and medical care – this is a drag on the GDP of a nation. It’s not for lack of trying by policymakers, as Japan is undergoing some progressive changes that challenge entrenched cultural traditions and the hope is this will create a more sustainable future for the country (See: With Age Comes Wisdom). Problems aside, Japan remains a key market for a diverse portfolio. Stock pickers only!

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WITH AGE COMES WISDOM AS JAPAN’S POPULATION AGES, THE COUNTRY OFFERS LESSONS ON DEALING WITH AGEING POPULATIONS BEN PICKETT

| INVESTMENT RESEARCH

“The only two certainties in life are death and taxes”.

Behind that quote stands a gentler, less morbid truth: ageing. According to the UN, the global population is starting to get its first grey hairs as the proportion of over 65s rises from one in eleven in 2019 to one in six by 2050, while 55 countries will see their populations decline across that period. Before, with just-in-time supply chains and stakeholder capitalism, the world has watched and learned from Japan’s example; as its median age pushes beyond 48, willing or not, the country yet again looks to become an important case study from which we can learn.

Japan’s population is ageing faster than most: its people have the world’s second longest average life expectancies at 85, and its birth rate is falling. When people live longer and the makeup of the population shifts, society must inevitably adjust to manage the new challenges a new demography brings.

For a government to manage such a transition effectively, the first task is to manage the assumptions that underpin public policy. In some regions of Japan where rural towns have seen declining populations for some time, urban planning has long shifted from a focus on managing growth, to a focus on managing decline. A lighter touch national strategy can be credited as a success by one simple fact: two people can be identical on paper, but different circumstances grant them completely different mental and physical health. Instead, the response is nationally funded, but localised, with policy ideas being targeted to local issues and partially derived from citizen consultations – people often know the problems they face better than those who design policy, and usually know how they can be solved.

One element of impact on governments is budgetary: per capita healthcare spending on patients over 75 is four times

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higher than for those below, which has caused spending on healthcare as a proportion of GDP to steadily rise. Though a recognised problem around the world, Japan’s is one of the few governments to start to think about meeting this funding gap through its long-term care insurance system where 40 to 65-year-olds pay compulsory insurance for over 65s. To manage the expense, the insurance is only available after a questionnaire, assessment by a doctor, and patients must meet 10% of the cost themselves. Though the scheme is by no means fully funded by the premiums, it is also notable in its reticence to place further financial burdens on the young who already face unprecedented challenges. One of the country’s subtle, but most important, changes is the shift in its policy from extending lifespans, to extending healthy and autonomous lifespans, which factors in quality of life. People may be living longer, but it is important to ensure they spend that extra time happy, fulfilled, and most importantly, healthy. With regards to improving quality of life, it is instructive to remember the proverb “A healthy man wants a thousand things, a sick man only one”.

Part of administering that objective involves changing the way society views ageing, characterised by the fact that nearly half of 65 to 69-year-olds and a third of 70 to 74-year-olds have jobs. This period has been dubbed ‘second life’, and municipalities have encouraged this cohort to not work for money, but for meaning and well-being. Local authorities have experimented by supporting the retraining of retirees to become farmers and priests, with some companies even providing funding for them to launch start-ups.

As its growth slows and reverses, optimising the population you have becomes more important. Here, lessons can be drawn by omission. Breaking down inequalities by making work more accessible to women, while improving their career opportunities taps into a large but underused pool of labour.

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Japanese corporate cultures too often favour male seniority over merit, which disincentivises ambitious women and young people to advance and forces them into insecure jobs.

Its focus on health is also a model to follow as the country addresses a microcosm of global issues. When the number of people worldwide with dementia is estimated to treble to 150m by 2050, Japan’s innovations in care are ones to watch closely.

Obesity is a key risk factor that itself exacerbates arthritis, breathing difficulties, and a vulnerability to other diseases that already comes with advancing age. Yet a healthier, more balanced diet with fewer fats and dairy, as well as a more physically active population, have contributed to an obesity rate of just 4% in over 18s. A healthy lifestyle complements a focus on preventative medicine, which is far more cost effective than treating illness when it arrives. Community centres with gyms promote exercise and socialising, reducing loneliness, the likelihood of cognitive decline, and feelings of dependence on younger family members.

Innovative active care is exemplified by Nichi Gakkan, a medical services company, which has created humane care facilities specialised for residents with Alzheimer’s and makes use of both volunteers and public insurance. The company houses 130,000 residents across Japan, but Tokyo alone has a shortage of 140,000 care beds and its high standard of care is very labour intensive. Such a fact will have to change given that the number of care workers is currently projected to need to increase by seven times from a base of 1.5m and a shortage already exists.

When the cost of labour rises, the rate of automation tends to increase. Hope is being placed in the country’s expertise in robotics to fill the gap. SoftBank has developed ‘CareRobos’ - humanoid care robots that offer exercise classes, talk to patients, and monitor corridors at night. AIG, an insurer, has

even agreed to help cover the cost of developing some robots as it looks to improve the affordability of care. More innovative medical equipment has been designed to assist care workers rather than replace them, meaning they can cover more patients. Though the thought of humanoid robots might evoke images of a dystopian future, a study found more than a third of residents became more active and independent from their use.

When demography changes and the needs of the population shift, markets evolve. Under 55s in Japan now hold only 28% of personal financial assets, which has made them an increasingly niche market to target. A rapidly growing market for easy-to-use mobile phones has emerged to cater to the older population, while adult nappies for incontinence now outsell baby pampers. Meanwhile, labour shortages in agriculture have created a unique environment for vertical farming to take off.

Despite their growing importance, support for this group can at times be scant. A spate of scams and mis-selling to vulnerable clients has caused the financial services industry to avoid elderly clients rather than reform: an ultra-loose monetary policy squeezes margins and makes absorbing the costs difficult. The financial services agency predicts that by 2030, US$2tn in personal financial assets will be in the hands of people with dementia, representing a slowly unfurling crisis as markets face a cohort of vulnerable investors with little support. Some companies are looking to change this, such as Neurotrack, which has developed diagnostic tools to detect dementia and advise firms in caring for these clients. They have helped design the country’s first dementia insurance product with Dai-ichi, which has been wildly popular as consumers try to hedge the risk of developing it. In government policy, as in insurance, the pay-out comes far into the future.

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SONY: THE GREAT INNOVATION RACE HARVEY EAST | INVESTMENT EXECUTIVE

Our December 2021 issue of Market Insight explored the potential of the Metaverse, discussing how the next iteration of the internet is likely to have an unimaginable impact on our lives. As a reminder, the Metaverse is the latest tech buzzword that is used to describe the potential for a world where people have virtual personas for work and leisure that can be distinct from, though linked to, their personal selves and represented by avatars within a virtual society. At this nascent stage, it is difficult to accept the idea of an immersive society that seamlessly spans the physical and digital realm, though the visionaries amongst us liken such attitudes to those held during the foundation of the internet. Nevertheless, an area where the potential for the Metaverse cannot be disputed is gaming which already offers a vision of how this world may look.

Over the past three decades, it is difficult to dispute that the Sony

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Corporation has been the dominant player within the gaming industry. Sony’s PlayStation brand has consistently sold greater volumes than the closest competitor, Microsoft’s Xbox, driven by superior technical specifications and network effects. Such dominance has been the crown jewel of the Sony business as Gaming & Network Services has grown to represent the greatest share of the business revenue and has acted as the primary driver of growth. As noted in our previous issue, the opportunity set within the development of a Metaverse is vast and threatens to drastically alter competitive forces across industries. The gaming industry will be at the forefront of this change, thus the winners of today may soon find themselves displaced by those who best anticipate the technological transition.

The Sony Corporation represents the epitome of Japan’s technological excellence, long providing some of the most advanced technological solutions across product categories.

While such excellence will always act as a strength, its

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importance within gaming may be becoming secondary as the key competitive battleground moves to content. The goal is to build a games service that attracts hundreds of millions of subscribers, in other words, to become the ‘Netflix of Gaming’. As we have seen within the video streaming industry the price of content is not cheap. Disney Plus’s recent expansion of their Mandalorian series cost US$15m per episode while Amazon Prime’s upcoming Lord of the Rings series has been given an eye-watering budget of US$450m.

The goal is to drive new subscribers to their platforms and maintain existing subscriptions, maximising a consistent, visible revenue stream viewed favourably by investors.

chest or look at entering strategic partnerships. The Japanese conglomerate has recently entered into a partnership with fellow Japanese company Honda to enter the electric vehicle market, combining Honda’s engineering expertise with Sony’s technical excellence; perhaps a similar strategy could be pursued within gaming to challenge Microsoft.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.

The thesis is very much the same within the gaming industry. Both Sony and Microsoft offer subscription gaming services that provide full access to a broad range of gaming titles at a fixed monthly cost. The goal of maximising the value of such services has seen the gaming industry become a hotbed for dealmaking activity.

Most notable of all was Microsoft’s recent US$69bn cash acquisition of the US games developer Activision FINANCIAL Blizzard which represented SERVICES the business’s largest-ever deal and allowed the internalisation of some of the most popular gaming titles such as Call of Duty.

This landmark deal followed an intense period of deal-making from both Microsoft and Sony. In May 2021, Sony allocated a budget of US$18bn to strategic investments, the majority of which has been spent on acquiring exclusive content rights, most recently acquiring games developer Bungie for US$3.6bn as a defensive move against Microsoft. The end goal of this likely is to increase the exclusivity of content, forcing consumers to choose based on their desired titles.

21%

18% ELECTRONICS PRODUCTS

29% GAME & NETWORK SERVICES

The concern for Sony is the winners are likely to be those with the deepest pockets. In its 2021 annual report, Microsoft reported Cash and Cash Equivalents of US$130.3bn compared to Sony’s US$42.4bn for the comparable period. The weight of Microsoft allows it to complete transformational deals that rapidly increase the value of its exclusive offering at the expense of PlayStation users. Such concerns appear to be shared by investors as Sony shares tumbled 13% on the announcement of Microsoft’s Activision deal.

To conclude that this represents the demise of Sony’s gaming offering would be short-sighted; after all, despite a torrid period of chip shortages, the latest of the PlayStation consoles has still outstripped sales of the latest Xbox and remains in hot demand with restocks being cleared out almost instantly; the same cannot be said for the Xbox. Nevertheless, it would seem in this new competitive landscape Sony will be under increased pressure to efficiently allocate its comparatively limited war

32% OTHER Sony Business Segments % of Total Source: Factset 7

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ONE PARTY STATE

A HISTORY OF JAPANESE DEMOCRACY KAITLIN FITZPATRICK-SPACEY | INVESTMENT RESEARCH

After the end of World War II, with Japanese cities physically devastated and over two and a half million people dead, the Supreme Commander of the Allied Powers staff (SCAP) were set an ambitious task to rewrite the 1889 Meiji Constitution. The aim of the new constitution was to reshape post-war Japan to make the Emperor accountable to the Japanese people, eliminate Japan’s ability to wage war, and create a parliamentary system akin to the British system, abolishing the inherited power of Japan’s aristocracy. The 1947 constitution, therefore, revised the relationship between state and society by establishing a democracy in the form of a constitutional monarchy, designing a new role for the Japanese imperial family while leaving the Emperor as the honorary figurehead of the country. Japan’s political system is, therefore, structured using this constitution which from its enactment has distributed governmental power between three branches: The National Diet, the Cabinet and the judiciary sections of the government, serving as the legislative, executive and judiciary branches respectively.

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Prior to 1947, during the Meiji restoration of 1868, the Emperor, known as Tenno, held almost absolute power, being the constitutional monarch as well as a divine sovereign who was the focus of loyalty for his subjects. Under the modern Japanese political system, the Emperor lacks direct political power and primarily serves as a symbolic and religious figure who carries out ceremonial duties such as appointing the Prime Minister and the Chief Justice of the Supreme Court into office and presenting distinguished awards from the government of Japan. In 2019, the previous Emperor abdicated and passed the role on to his son. Both act as the symbol of the state and of the unity of the people of Japan.

While the Imperial family serve as ambassadors of Japan, hosting high profile officials and guests from abroad, and visiting foreign nations on diplomatic missions, it is the National Diet which has the highest level of state power in the country being the only section of government that can authorise new laws. The legislative Diet is comprised of an upper house known as The House of Councillors consisting of 242 members who serve six-year terms, and a lower house known as The House of Representatives, consisting of 480 members who serve four-year terms. Both groups encompass

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the main functions of appointing the prime minster of Japan, approving the national budget, ratifying international treaties, and creating and implementing redrafting of the constitution. The majority of each house are voted into office directly from their local districts; however, 96 members of the House of Councillors and 180 members of the House of Representatives are preferred party members appointed via the proportional representation system based on the number of votes that were given to each political party.

Although the Diet hold the utmost state power, the prime minister of Japan is the face of the country’s acting government who drives domestic policy and governs the nation’s foreign diplomacy. One is required to be a Japanese national along with being a standing member of the current National Diet. They are not elected via a direct vote from Japanese citizens, but rather by the Diet itself. As a result, whichever party holds control in the Diet will likely appoint their party leader to be the prime minister. The incumbent Prime Minister will also directly appoint the managing bodies of Japan’s governmental agencies, known as the Cabinet in which its positions, known as ministers, must likewise be filled by National Diet members. These Ministers of State will oversee the 11 ministries of Japan – specialised divisions that direct policy over particular facets of the nation’s functioning.

Under Japan’s constitutional monarchy system, there has been one party that has dominated the country’s politics since its founding in 1955: The Liberal Democratic Party (LDP). The LDP emerged in the wake of the US occupation of Japan in which they aimed to promote democracy and eliminate the influence of the military in the Japanese government, while also coinciding with the emanation of the cold war. After the socialists set aside their differences to form a single Japan Socialist Party (JSP) in 1955, a decision was made to merge the two main conservative parties: The Liberal Party and the Japan Democratic Party, after precedent failures of any party to secure an overwhelming majority. Although at the time the Socialist Party were gaining more potency, the conservative Liberal Party and Democratic Party had more voters from inception and were able to consolidate support after their merger. As a result, the LDP won almost double the number of seats as the JSP. This established the 1955 system, in which the LDP maintained its status as the dominant party, and the JSP to this day have not been able to muster enough support to seriously challenge it. In its time, the new LDP has gained approval as it oversaw Japan’s economic growth miracle and it has also benefited from a favourable electoral system skewed towards the rural areas where party influence is strong.

The LDP have only been succeeded twice in its governmental power, in which the 1955 system ended in 1993 when a group of LDP heavyweights broke away from the party and formed an alternative coalition government with opposition parties, forming the Democratic Party of Japan (DPJ), who also gained victory in 2009. In its presiding, however, it struggled to implement policies, estranged Japan’s powerful bureaucracy and succumbed to factionalism, changing prime ministers twice in three years. Its mismanagement

of the Great East Japan earthquake also lost the DPJ great popularity, setting the stage for LDP’s resurgence. The LDP also has the comfort of its alliance with 1999-founded Komeito, the unofficial party of Soka Gakkai, a lay Buddhist group that has roughly 8m members across the country and persist to be strong in urban areas where the LDP is weaker.

It has proven a potent combination to retain power in recent decades.

With no viable alternative the previous three prime ministers, and therefore the National Diet majority, have been LDP members. The most recent election in September 2021 saw Fumio Kishida formally take the office as Japan’s new prime minister, succeeding Yoshihide Suga who resigned after just one year in office. Suga became prime minister after long-serving Shinzo Abe stepped down in 2020 over health concerns, however, his popularity plummeted over his poor handling of the COVID-19 pandemic in the wake of the Tokyo Olympics invoking his decision to resign. He had hoped that the Olympics would help boost his rankings, but they simply sank even lower even with Japan’s record medal count. The more contagious Delta variant bolstered the number of COVID-19 cases to all-time highs in the summer of 2021 causing great frustration among the Japanese public over Suga’s decision to hold the international event amid a pandemic in the first place. During his leadership, he further consistently ignored government pleas to stay at home crippling support for the Prime Minister to below 30% in both July and August. With LDP members beginning to worry that having Suga as a party leader could cost them seats in October’s general election, it is likely that Suga was persuaded to step aside.

Mr Kishida has a strong challenge ahead of him to help his party regain popularity, however, he was warmly welcomed by the Japanese citizens. Despite increasing cases of COVID-19 and rising food and gas prices due to Russia’s invasion of Ukraine, he is seeing good polling numbers being six months into his term, with his Cabinet receiving a 59% approval rating, compared to 44% for Suga in the previous year. The Kishida administration has been praised for its leadership and willingness to rapidly impose sanctions on Russia amid its invasion of Ukraine. This has, however, been causing problems for previous Prime Minister Abe who had a close relationship with Russian President Vladimir Putin. There has been a strong rivalry between Abe and Kishida since the presidential election when Abe initially backed Sanae Takaichi, a close ideological ally, over Kishida who soon lost in the first round of voting. Besides their personal rivalry, Kishida and Abe lead their own factions and they will be relying on the Upper House election in July as a chance to hike their numbers. Abe is head of the LDP’s largest faction, with 94 members, and Kishida’s faction has just 45 members.

Even so, ongoings in Ukraine and Kishida’s popularity mean that Abe no longer holds the authority that he used to even if he remains a formidable figure and heads the largest faction.

His influence within the LDP is starting to weaken, yet once the Russia-Ukraine conflict calms down and the July election passes, it is likely that the rivalry between the two will intensify further.

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JAPAN

ECONOMIC REFORM AND INNOVATION ANDREW RHODES | MARKETING

Japan is a country with a long and rich history, and one with a truly unique culture. Many areas of Japanese culture, both old and new, are enshrined in long-standing traditions, some of which have worked their way West as wider interest in areas such as food and drink, literature and entertainment have grown.

In fact, innovations of both cultural and technological natures have had a profound impact on the West in more ways than we can imagine. Many of the Japanese companies we recognise as household names have been the result of a technological boom which has seen the country lead the way on innovation.

Sony, Nikon and Hitachi are all leaders in their respective technological fields, and all find themselves on the JP225 list. However, Japan’s recent economic history is the result of

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years of considered development, beginning in the post-war years, with the country being redeveloped both socially and economically.

The country’s economic landscape has evolved several times since the end of World War II to become almost unrecognisable from just a few decades ago, initially focusing on manufacturing in the years following the war to later become focused on consumer and commercial technologies.

In the years after the war, the country experienced significant economic growth, benefitting from close ties between the government and big business, through the Ministry of International Trade and Industry (MITI).

In those years, Japan adopted technology and quality control methods from the West, developed close economic ties with

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the United States, and introduced longer working hours, restrictions on labour unionisation, and easier access to overseas trade. By 1955, the economy had grown beyond prewar levels and by 1968, Japan was the second largest capitalist economy in the world.

There have been numerous global and nation financial crises, though, in the past 30 years, and Japan experienced its own in the 1990s. The 1990s in Japan is often referred to as “The Lost Decade,” during which the country experienced economic stagnation which became one of the longest-running economic crises in recorded history. During this period, the country suffered both a credit crunch and a liquidity trap – where interest rates are low and savings rates are high – with some attributing the problem to misguided government policies and

government reforms has caused companies to focus more on shareholder returns, while labour and working culture reforms, aimed at turning around a shrinking workforce, have seen more women and retirees being brought into work, while the practice of lifetime employment – the decades-old concept of working for one company from graduation through to retirement – has begun to fade. These policies, among others, have helped Japan’s economy recover and, with an increasing focus on innovation, have allowed the country to flourish.

After taking office in September 2021, Prime Minister Fumio Kishada is expected to continue on the country’s path of economic growth by eyeing long-term results and wealth creation for its citizens and investors. To promote economic growth, Kishada recently announced a near US$500bn

In recent years, though, the outlook for the country’s economy is looking brighter, and many see Japan as an eye-catching area for investment activity.

the Bank of Japan following a real estate bubble.

To illustrate the extent of the crisis, Japan’s economy in the 1980s grew at an average annual rate of 3.89%, ahead of the United States’ economy (3.07%). However, between 1989 and 1992, equity values fell by 60% and by 2001 land values plunged by 70%, with the country’s economy growing by just 1.14% annually between 1991-2003. The JP225 has still not recovered to pre-1990 levels.

In recent years, though, the outlook for the country’s economy is looking brighter, and many see Japan as an eye-catching area for investment activity. The country has undergone numerous policy and structural reform initiatives designed to shape future growth. Improved corporate governance achieved through

stimulus package amounting to more than 10% of Japan’s GDP. The route forward is still far from clear, though, particularly in the aftermath of the COVID-19 pandemic. Supply chain disruptions still blight Japan and many of its trading partners around the world, while the existing microchip shortages continue to affect many industries.

What is clear, though, is that after the series of reforms around working practices introduced in the past few decades, particularly around corporate governance and working cultures, Japan continues to be a leader not only in global economics, but in the industries in which its widely-known companies operate and innovate in.

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Period of extreme as world economic Emphasis on prese traditional Japanes rejection of "Weste

1914 1853 US fleet forces Japan to open up to foreign influence after 200 years of self-imposed isolation.

Japan joins World War I on the side of Britain and the allies, gaining some Pacific island territory at the end of the war.

LATE

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COVID-19 pandemic hits Japan, Shinzo Abe steps down as Prime Minister, with Fumio Kishida at the helm today.

2012

Shinzo Abe becomes Prime Minister for the second time, approving landmark changes to security policy under his leadership.

2011

Amidst the global financial crash, Japan experiences its worst financial crisis since World War II, with the economy shrinking by 3.3% in Q4 2009.

China overtakes Japan as the world’s second largest economy. An earthquake and tsunami cause damage to the Fukushima nuclear plant.

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The “Lost Decade” stagnation. GDP pl the country enters a recession in 1997.

2009

2006

Shinzo Abe becomes Prime Minister, but resigns in 2007.

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nationalism begins c depression hits. ervation of se values and a ern" influence.

北海道

Japan enters World War II on the side of Germany before surrendering in 1945 and being placed under US military government.

s

HOKKAIDO

SAPPORO

Japan regains independence in 1952 and joins the United Nations in 1956.

Japanese car manufacturer Honda opens first plant in the United States.

” of economic lummets and a severe

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1939-45

1982 本州

1990-2000

HONSHU

TOKYO NAGOYA

MT. FUJI

OSAKA

四国

SHIKOKU

九州 KYUSHU

日本史

A Brief History of Japan

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JAPAN UPDATE ANCA VASILOV | HEAD OF EQUITIES EMEA ASSET MANAGEMENT ONE INTERNATIONAL LTD. This is article is an advertisement by Asset Management One International Ltd. and is for information purposes only.

THE UPCOMING SHARE MARKET REORGANISATION From April 2022, Japan’s share market is undergoing a once-in-a-generation reorganisation. The new structure saw the introduction of a simpler, three-segment market structure. Requirements to join the top echelons of the listed share market tightened. The overarching aim of the changes, according to the Japan Exchange Group (JPX), is to “boost listed companies’ sustainable growth and mid-to long-term corporate value creation.” In this article, we review the details announced to date.

WHAT IS CHANGING? Two major changes are being set in motion, starting in April 2022. First, the current market segments of the Japanese cash equity market were reorganised as of 4th April 2022. Second, the representative TOPIX index will

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undergo gradual changes over a longer period, due to complete by the end of January 2025. We recap below the main upcoming changes.

PRIME, STANDARD AND GROWTH MARKETS Currently, Japan’s equity market has four listing segments – TSE 1st Section, TSE 2nd Section, JASDAQ (Standard and Growth) and TSE Mothers. On 4th April 2022, the market began being reorganised into three listing segments: Prime, Standard and Growth each with their own listing criteria. The Prime Market will set higher listing standards than the current TSE 1st Section, including adherence to the highest levels of corporate governance as stipulated by the latest revisions to Japan’s Corporate Governance Code. The Standard Market will include companies with sufficient

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Within the key listing requirements for each new market segment, of particular focus over the past six months have been the greater requirements set for a Prime Market listing. These include the need for a company’s tradable shares to represent at least 35% of overall share capital, and for the tradable market cap to exceed JPY 10bn. With shares held by domestic banks, insurance companies, or business corporations excluded from tradable shares, this requirement has already started to act as a spur to further corporate reorganisations in Japan.

The result of new segment selections was published by the Japan Exchange Group in early January 2022.

A total of 1,841 companies will be admitted to Prime.

This represents a decrease from the near 2,200 current constituents of the TSE 1st Section. Over 600 of the TSE 1st Section companies did not meet the listing criteria for the Prime Market as of 30th June 2021 (the base date for the transition). Of these, 296 companies submitted plans to the exchange in order to meet the criteria in the future. This group of companies has secured Prime listing. 1,477 companies are due to join the Standard Market, comprising of current 2nd Section and JASDAQ Standard constituents, as well as a number of companies currently listed on the 1st Section. 459 companies will list on the Growth segment.

CORPORATE GOVERNANCE CODE REVISION The Corporate Governance Code, implemented in 2015 and first revised in 2018, has already brought about substantial change across corporate Japan. Further revisions to the Code were unveiled in June 2021.

For companies listed on the Prime Market, the revision sets higher requirements. Amongst the newly covered or further revised areas are the exercise of shareholder rights at General Shareholder Meetings, sustainability initiatives, diversity, English language disclosures, Treating Customers Fairly disclosures, the effective use of independent directors, preconditions for Board effectiveness, and policies for constructive dialogue with shareholders. All 83 Principles of Corporate Governance (excluding Principles for Prime listed companies) will also apply to companies listed on the Standard Market. This represents a significant increase for the over 600 companies previously listed on JASDAQ Standard, which previously had only applied to five General Principles of Corporate Governance.

PROPOSED CHANGES TO THE TOPIX INDEX In conjunction with the listing segment changes, the TOPIX index will also change. Currently, the TOPIX index includes all stocks listed on the TSE 1st Section (in excess of 2,100 companies). As outlined above, the Prime Market segment will not include all current

constituents of the TOPIX index. However, there was no immediate change to the TOPIX index in April 2022. Companies currently included in the index are able to retain their position for the time being. Thus, as of April 2022, the link that currently exists between the listing section and index inclusion was broken. For a period of time, the TOPIX index is expected to include companies listed on both the Prime and Standard Markets. However, companies whose tradable market share are below the JPY 10bn threshold at two predetermined points will see their index weight gradually reduced to zero by January 2025 (“phased weighting reduction constituents”). It is notable that all crossshareholdings other than those classified as “pure investment purpose” will be excluded from the free float definition.

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The Corporate Governance Code, implemented in 2015 and first revised in 2018, has already brought about substantial change across corporate Japan.

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liquidity and governance levels to be represented in the public markets, while the Growth Market will include companies with high future growth potential.

The reorganisation is best understood in the context of the multiple changes to Japan’s corporate landscape implemented in the past seven years, and its aim is to further improve the investment attractiveness of Japanese stocks for both domestic and foreign investors.

Disclaimer: This is an advertisement and for informational purposes only. Asset Management One International Ltd. (“AMOI”) is authorised and regulated by the Financial Conduct Authority (“FCA”) in the UK. This article is addressed only to Professional Clients and Eligible Counterparts as defined by the FCA. Any persons falling into other client categories, including Retail Clients and persons who are restricted in accordance with any other applicable laws and regulations, should not rely or act upon it. If you have any doubt about any of the information in this material, please consult your financial advisor. This should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. The value of an investment portfolio and the income from it may fall as well rise and investors may not get back the amount originally invested. Past performance is not necessarily a guide to the future. The reader must make his/ her own assessment of the relevance, accuracy and adequacy of the information contained in this article, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment. AMOI is not in any way sponsored, endorsed, sold or promoted by Japan Exchange Group, Inc.

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