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2024 has been a record-breaking year for Japan, with the Nikkei hitting 40,000 in March. We’ve also seen 97 companies go public, raising JPY 570 billion as well as a surge in private equity dealmaking. Deal values have tripled on average since 2018, and we’ve seen unprecedented capital levels in Japanese financial markets, with investments at a ten-year high. What were some reasons for Japan’s extraordinary performance in financial markets, and what do you think has made Japan an attractive destination for foreign investors?

Simply put, with the depreciation of the JPY, the profitability of Japanese companies has risen, and the expectation for corporate governance reform supports the share price. The big boost of inbound tourists due to the weak JPY has also boosted domestic consumption.

Japan is still a country that is highly affected by outside demand rather than inside demand. The JPY depreciation has greatly pushed the demand for Japanese products and goods overseas, which has boosted stock prices.

TSE’s recommendation, which urged improvement for companies whose price-to-book ratio (PBR) was below 1.0, was also important. It turned the mindset of those companies to improve profitability, which led to huge share buybacks. The PBR has been uplifted to 1.5 for Japanese companies in the Nikkei 225 index (1.32 as of September 6), while US companies in the S&P 500 index have around 5.0. The expectation for Japanese companies is to grow even further.

Many in the industry are questioning the differences between external and internal factors. In recent months, domestic and international media have questioned whether the bullish momentum that Japanese equities have had keeps going. At the core of the argument is that the recent surge has mainly been based on macroeconomic factors such as the JPY and the zero-interest-rate environment and that the momentum might shift if those factors change. On the other hand, some argue that internal reforms such as the corporate governance reforms and NISA are the reasons for this. Should macroeconomic conditions normalize, do you believe those internal reforms will be enough to push the bullish momentum forward?

Regarding the matter of whether internal or external factors have more weight, I think internal factors have much more weight and impact on the price of stocks. It is true that if you look at the last few months, the rapid increase in Japanese stock prices is going a little overboard due to strong external influence. At the same time, it is important to note that unprecedented changes in fundamentals have been made by internal reforms, including corporate governance, and have urged companies' management to be more aware of stock prices and the cost of capital. You can see a gradual but steady change in their mindset.

Corporate governance reforms have seen share buybacks increasing for four consecutive years. How do you rate those reforms, and what further reforms would you like to see in the future?

The reform has just started. In the past, Japanese companies had particularly focused on profit and loss, but that mindset has shifted towards ROE or ROIC, the metrics overseas investors are looking at. Capital efficiency is a key driver of M&A or disposal of unprofitable businesses, and I believe those will surely be accelerated further. The increasing company share buybacks and relinquishing of cross-shareholdings is also motivated by the change in shareholders’ mindset. It clearly shows that companies need to increase their own capital efficiency to be self-sustaining.

NISA, short for Nippon Individual Savings Account, is a tax-advantaged investment account in Japan designed to encourage individual investment in stocks and mutual funds, and the government revamped the program in January 2024. This move aims to turn trillions of JPY held in cash by households into investments. Interestingly enough, the most popular investment vehicle for Japanese households turns out to be mutual funds. Do you believe that NISA will be successful in reversing this trend and driving more investment from Japanese households back to Japan?

Without a change in the flow, NISA will not be successful. The biggest reason why households’ savings have not invested in Japanese stock is simply because the stock has not performed well for decades. Japanese individual investors who are already in the market have high literacy and choose US stocks index funds with high-growth and low-cost.

To change this situation, firstly, Japanese companies must change themselves to be more attractive, as I explained. Reforms in macroeconomic systems are also necessary. The Japanese income tax rate is high, and people have to pay for healthcare and pensions, which creates a huge burden on the public and their investments. There is no easy solution. The change in both companies and the government is needed.

What products and services are you offering to bring investments back to Japan?

Japanese asset management companies are now looking to diversify themselves and develop their own uniqueness. Pursuing scale by providing index funds is one way, but MYAM is an active manager. In the US market, where PBR is five times and ROE is around 18%, it is not easy to outperform the index. But in the Japanese market, where companies are on their way to improving, we, active managers, have a good chance to beat the market. That’s what we are providing for our customers.

As for foreign investment in Japan, those tend to be more focused on index funds to increase exposure to Japanese stocks quickly, which is acting as a headwind against us. But we will see, in the future, the situation may change, as those investors seek more efficient means in the active investment, and then we may come into play.

There is still room for Japanese equities to attract foreign capital. European and Asian investors have been the dominant force, but the US has yet to embrace the situation fully. The US has a relatively small presence, averaging just JPY 65 billion in net purchases per month from April 2023 to January 2024. A potential cut in US interest rates, however, could unleash new capital from the market, whose players are famous for their focus on growth investing strategies. How do you expect foreign investment flow to evolve over the coming years, and what products and services do you offer to cater to foreign investors?

That is an area which we are looking at. We are seeing growing interest and increasing inquiries from foreign investors for Japanese stocks products, especially active mid-to-small caps’ funds, which we are aiming to promote. On the other hand, with the low interest rates and yields, Japanese bonds may not look attractive for them.

On top of classic domestic and global equities, you are strong with medium-to-small scale caps and ESG-related funds. You also have funds linked directly to alternative assets and multi-asset solutions. Are there any new products you want to develop in the future? How does this diversified product portfolio help you better cater to the demands of institutional investors?

Japanese asset management companies are now actively enlarging their product offerings and enhancing their portfolio through M&As or alliances. Our company is looking to expand alternative investment and private asset investments, working together with our counterparts. It is important to think about the advantages for our customers of using our company as the middleman or the entry point when counterparts sell the same product directly to the market. Our advantage is the ability to provide the right information at the right time. We must continuously strengthen this advantage to continue to be chosen by customers.

The weakness of Japanese asset management companies is that we don’t have bases overseas, so whether acquiring overseas companies, finding a partner, or having a direct operation locally is something we need to contemplate.

You mentioned diversification strategies on alternative assets and private markets, but private markets in Japan have been rocky over the past year. We’ve seen big names in the industry become extremely bullish at the idea of taking companies private. How do you foresee the evolution of the private market? Do you think the boom of recent years can be sustained?

The problem is that “democratizing“ private assets may mean lower returns. The strength of private assets is the higher return, otherwise private assets wouldn’t have any merit compared to public assets. While the market is rapidly growing, I cannot foresee huge growth continuing in the field unless the asset class can keep the higher expected return to cover its liquidity risk.

Meiji Yasuda Asset Management (MYAM) has its Select Japanese Equity Fund (Hajime-kun), which was awarded the first prize of Japanese Growth Equity Fund in an investment trust category. You also have High Dividend ESG Japanese Equity in the ESG category, which was awarded first prize in the Japanese Equity ESG category. What are the competitive advantages that allow MYAMs funds to perform so well?

I think the uniqueness of Hajime-kun lies in its investment structure. While our funds are basically managed by a team, Hajime-kun, its portfolio manager, has a huge say in stock selection to pick up attractive mid-small names that have not yet been discovered by the market. Current trends are toward index funds, and it is against us, but once the economy of Japan accelerates, mid-sized companies will see a sharp increase in profitability. These mutual funds have high volatility yet a high potential for big returns. It is a fund that we recommend customers own for the mid-to-long term.

Our High Dividend ESG Equity Fund focuses on both ESG and high dividends themselves. For more than ten years we have had engagements with companies to promote their values, and now we’ve introduced more of this engagement aspect together with the selection of high dividend stocks. With NISA, individual investors are purchasing high dividend stocks that have pushed the performance of the fund.

MYAM is the core asset management company for the Meiji Yasuda Life Group, one of Japan’s oldest and largest life insurance enterprises. The group was created in 2004 by merging Meiji Life and Yasuda Life. What synergies are you able to create by drawing on the strengths of Meiji Yasuda’s ecosystem?

As a group we have a very tight-knit relationship. Unfortunately, I cannot fully disclose our strategy, but needless to say, we do plan on fully leveraging the tools and network our group has. We are considering various options to attract more foreign investors.

You mentioned a target is to attract more foreign investors. Earlier you mentioned that you were perhaps looking for a partner or to possibly open an office overseas. Do you have any countries or regions that you are specifically targeting as a potential location?

It is unlikely that we establish an overseas business outside Japan, but we are trying to find out what can be the best alternative. It is often said that Japanese businesspersons are less greedy. Especially in the financial industry, we have often confined ourselves in the country because of our poor ability to learn a foreign language or because of the market size, which is big enough to sustain businesses. But now, we need to shift our mindset to a more global one.

MYAM has joined the Net Zero Managers Initiative, an initiative that aims to achieve net zero greenhouse gas emissions within investment portfolios. What key strategies have you implemented, and will you implement to strengthen your profile as a responsible institutional investor?

Achieving net zero carbon emissions in 2050 is a goal so far ahead into the future that it is hard actually to envision, but I strongly believe that the near future will be a point where environmental friendliness is linked to investment return. We don’t know when it is but, while we hear many opinions, we believe that this is an important step to take, envisioning the future ahead.

There are a lot of arguments, especially in the US, that sometimes ESG investing goes against the interests of shareholders or clients of asset managers. Some asset managers who had pushed ESG suddenly decided to retreat from the issue. Do you think such a risk, such a counterwave is sustainable?

The US decides the fates of financial markets, so if Mr. Trump is elected as President once again, ESGs would inevitably see a downturn. It is, however, important to note that industries across the world are taking active steps, led especially by Europe and Japan, to achieve carbon neutrality. In terms of investment, ESG might not be mainstream, but as a global society, we will see the trend continue towards sustainability.

Considering you were appointed as president of your firm this year, what were some of the key characteristics you possess that led to your appointment?

The Japanese government is now strongly urging asset management companies to have investment professionals in their management positions, as being an asset owner and an asset manager are completely different things. For a long time, I have wondered what the best shape of management of this company is. To be honest, while I have a deep background in asset management, I never envisioned myself becoming a president of a company, but I did have many ideas on improving this company.

What targets or ambitions have you set for yourself now that you’ve taken on the role of president?

Ever since taking a management position I’ve always considered the employees as the number one stakeholders of the company. I don’t want any of them to leave the company, instead, I would rather see them happy as they work here. Now that I am the president of the company, I’m in a position to enact reforms to realize my ambition. 

For more information, visit their website at: https://www.myam.co.jp/en/