Activist Investing Takes Japan by Storm

A New Era of Shareholder Empowerment

Activist investing in Japan is in high gear these days. The country, once seen as a tough and closed-off market, has suddenly become a playground for activists. With its cash-rich companies trading at steep discounts, it's no wonder that international hedge funds like Elliott Management Corp. and home-grown investors like Strategic Capital Inc. are flocking to Japan. In fact, Japan has become the world's second-largest market for activists, only behind the US.

This year alone, activists have made 100 investments in Japanese companies, totaling around $318 billion in market value. To put that in perspective, it's already more than the total number of investments made in 2023, and we're not even through the full year yet. Shareholder proposals are also at a record high for the third consecutive year. These activists are certainly making their presence felt.

What's driving this surge in activism, you ask? Well, it's all about corporate governance reform. The government and the Tokyo Stock Exchange are pushing corporate Japan to elevate their game when it comes to shareholder returns. They're saying goodbye to the outdated practice of cross-shareholdings and hello to a new era of transparency and accountability. Companies are now finding themselves on a public name-and-shame list if their shares are trading below book value. The threat of public humiliation has forced executives to step up and come up with plans to boost their market capitalization.

The change in attitude towards shareholders has been a game-changer. Historically, companies in Japan relied heavily on debt financing, giving lenders the upper hand. Shareholders were more like silent partners, expected to quietly support management. But now, with activism gaining momentum, shareholders have found their voice and a seat at the table. They're leveraging their influence at shareholder meetings, demanding change and proposing resolutions that are binding.

It's not just foreign hedge funds like Elliott Management that are shaking things up. Domestic investors are getting in on the action too. Enter Strategic Capital, led by the seasoned activist Tsuyoshi Maruki. They're currently trying to convince shareholders to force out the president of Daidoh Ltd. at the upcoming AGM. Maruki believes that many Japanese companies still prioritize employees and management over shareholders. His mission is to change that mindset, one company at a time.

Of course, not every activist campaign is a guaranteed success. Some funds have met with losses, reminding us that this game is not for the faint of heart. But for those who have managed to navigate the Japanese market successfully, the rewards have been impressive. Take Elliott Management, for example. They've made significant investments in big-name Japanese companies like Mitsui Fudosan and Sumitomo Corp., pushing for share buybacks and asset disposals. These campaigns have yielded positive returns, showing that activism can indeed pay off.

Overall, the rise of activism in Japan reflects a newfound emphasis on shareholder empowerment and corporate governance reform. As investors and companies continue to adapt to this evolving landscape, we can expect more exciting developments in the world of activist investing in Japan.

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