Executive Summary

A Shift in Corporate Priorities. For decades, Japan’s corporations were managed to protect market share, headcount and influence, all at the expense of profits. Today, driven by a shift in corporate priorities, pretax margins are at record highs even as economic growth has been lackluster.

Two Phases of Reform. Even before some recent government initiatives largely aimed at boosting ROEs, a shift in corporate priorities got underway around 2009 and continued until the 2011 earthquake (“Phase 1”). The natural disaster proved to be only a temporary interruption of reforms that resumed in 2012 (“Phase 2”).

The Yen: a Catalyst not a Cause. A key catalyst for reform during Phase 1 was Yen appreciation that undermined the competitiveness of the export sector. However, in Phase 2, Yen weakness has not been the predominant driver of profitability, as margins of domestic services industries have also surged.

Recent Catalysts for Enhanced Corporate Governance. Separate from steps by corporations to increase margins, the government has recently promoted initiatives that should improve ROEs to the benefit of shareholders.

Japan remains top ranked in our strategy model. Since its introduction in April 2014, the Cornerstone Capital regional strategy model has been Overweight Japan.

Figure 1: Japan’s Corporate Governance Payoff
Pretax Profit Margin and Capacity Utilization in Japan

G dec japan cover chart

Source: Ministry of Finance, Ministry of Economy, Trade and Industry, Cornerstone Capital Group

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Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.