At a speech in the City of London last week, Japanese prime minister Fumio Kishida hit his audience with a consummate display of “investo-diplomacy”, making a pitch for investors to reconsider his country’s lowly status in global equity portfolios.
In the whirl of self and national promotion, you could almost forget that both Tokyo shares and yen have been falling steadily since he came to power.
But the timing, the pointed emphasis on reliable companies, products and services and the reference to the paramount need for “animal spirits’ in the private sector, was smart.
Corporate Japan, perhaps more so than any time in the last decade, has a narrow window in which to define itself to both domestic and global fund managers as the most investable equity class in Asia.
The circumstances creating this window – the pandemic, the shifting status of China in the calculations of global companies and investors, the redrawing of supply chains and a cheap currency – are in rare harmony.
The question is whether Japanese companies, with their history of missing windows, and Japanese households, with their history of ignoring the potential of domestic stocks, justify the leap of faith that Kishida is selling.
The speech was remarkable for several reasons. Kishida’s decision to identify himself as the first postwar Japanese PM with experience in the finance industry was a bold flex given that he worked for the Long Term Credit Bank, an institution that collapsed and became synonymous with the nation’s great post-bubble reckoning.
But he doubled-down a few sentences later, arguing that he was the most knowledgeable recent Japanese leader “when it comes to the realities of the economy and finance”. The contrast was deliberate. In 2013, Shinzo Abe schmoozed global investors to reconsider Japan with snappy (and ultimately unmet) promises of reform, change and the catchy exhortation to “buy my Abenomics!”.
Kishida’s slowly-forming concepts of “new capitalism” and the clunkier “you can invest in Japan with confidence” sound bite are calculated to present his reform story as a sober investment thesis against his predecessor’s risky punt.
For those looking for excuses to reconsider the prospects of corporate Japan, Kishida’s case was laced with reassurances. The references to new capitalism and to deepened partnership between the public and private sectors, for example, came with statements that he still saw strong corporate profitability as core to the whole project. The lines on promoting innovation within companies and on the need for a vigorous start-up culture were tailored to address two of the complaints that have locked-in Japan’s low allocation in global portfolios.
But the real stand out, said fund managers who attended the speech, was Kishida’s stated intent to make himself the prime minister who finally, after decades of abject policy failure and visceral public resistance, managed to convince households to move some of their roughly Y1, 000tn of bank deposits and cash into investments. Household financial assets have tripled in the US over the past decade, he noted, while Japan increased only 1.4 times.
As with much of the pitch, the details will have to come later. Kishida said he would mobilize “all policy measures” to advance a plan to double asset-based incomes, as well as expanding the tax-protected Japanese version of investment savings accounts. The theory of what happens next is well rehearsed. Once the Japanese households back – and are seen to back – the shares of their own corporate sector, the rest of the investment world will pile in.
The fundamental problem Kishida is confronting, though, may not be one of investment incentives or new mechanisms but of a deep disjoint over public perceptions of stability and risk. In many important respects, listed Japanese companies define low-risk reliability, often boasting of thick balance-sheet cushions of rainy day cash and run conservatively.
Somewhere between that reality and the decision of ordinary Japanese to put their savings anywhere near these stalwarts, though, arises the idea that to do so is an inherently dangerous gamble.
Kishida’s “invest in Kishida” speech followed a month in which, according to analysts, foreign investors are likely to have been net buyers of over Y1tn in Japanese cash equities. The fact that the market fell during April despite all that foreign buying suggests that by far the toughest audience for Kishida’s sales pitch will be at home.