Lots More on Why Japanese Stocks Are Surging

Episode Summary

Executive Summary: The episode centers on a long-form discussion of how Japanese corporate governance has shifted from entrenched crossholdings and insider-oriented management toward shareholder returns, activism, and capital efficiency. Guest Travis Lundy argues the change is real but slow, driven by weak banks, Abenomics, stewardship/governance codes, foreign inflows, and examples like Tokyo Electron and the trading houses that became market leaders.

Main Topics: Bloomberg podcast promo and show framing (Priority: 2/5): The episode opens and closes with promotions for Bloomberg’s short-form market update products, positioning them as quick daily tools for following stock movers and breaking news. The structural evolution of corporate Japan (Priority: 5/5): Travis Lundy explains how postwar crossholdings, bank-centric ownership, and relationship-based finance dominated Japanese companies for decades before gradually unwinding after crises and regulatory reform. Drivers of change in governance and capital allocation (Priority: 5/5): The conversation highlights weak yen periods, the banking crisis, cash accumulation, stewardship codes, corporate governance codes, and Abenomics as major forces pushing Japanese companies toward shareholder returns and better disclosure. Impact on labor culture and daily business practices (Priority: 4/5): The hosts ask whether high-level governance changes have improved day-to-day working life; Lundy says companies became less willing to pay overtime, workers sought better treatment, and foreign employers became more attractive. Case studies: CSE, Tokyo Electron, and the trading houses (Priority: 5/5): Specific companies illustrate the new Japan trade: CSE selling its Singapore Exchange stake, Tokyo Electron shifting toward buybacks and a 50% payout target, and trading houses like Mitsubishi and Itochu behaving like disciplined listed private equity funds. Foreign inflows, passive investing, and activism (Priority: 4/5): The discussion notes that foreign buying has returned but not yet fully offset prior outflows, while the rise of passive ownership complicates activism because governance pressure still depends on active investors. Abenomics as a long-run vindication (Priority: 4/5): Lundy argues Abenomics helped create the conditions for change by encouraging Japanese firms to value their strengths, invest, and operate with more humility and accountability, even if the transformation remains incomplete.

Key Arguments: Japanese corporate governance has genuinely changed, but the transformation has taken decades rather than years. Crossholdings were originally a relationship-based mechanism, not purely a defensive anti-shareholder tactic, but over time they became inefficient and structurally problematic. The unwinding of crossholdings accelerated after the 1990s bank crisis, equity declines, and increased foreign/public ownership, which raised scrutiny of management. A weak yen, overseas production shifts, and domestic stagnation pushed firms to hoard cash and rethink capital allocation. Stewardship and corporate governance codes, copied from overseas models, gave investors and regulators tools to pressure companies. Abenomics is partly vindicated because it reinforced a broader societal and policy shift toward higher returns and stronger governance. Day-to-day work culture has improved somewhat as companies became less able or willing to fund traditional overtime-driven socializing, and employees gained more mobility. Tokyo Electron became a landmark example of shareholder-oriented change after the Applied Materials deal collapse, adopting buybacks and a 50% payout ratio. The trading houses resemble highly effective, lightly understood investment platforms with strong personnel, long-term funding, and good capital discipline. Passive investing limits the direct influence of new inflows, so activism still depends on active shareholders and regulatory pressure.

Data Points: Stock Movers duration: 5 minutes or less - Bloomberg promotional segment describing the new audio report format. Japan market experience: 20+ years - Travis Lundy says he has been involved in Japanese markets for over two decades. Crossholdings in mid-1980s: two thirds of the market - Lundy describes how financial institutions and corporates held roughly two-thirds of Japanese equities. Dollar/yen move: 150 in 1990 to 79 in 1995 - He cites the sharp yen appreciation that hurt Japan’s export machine. Nikkei performance: 4 bagger to 5 bagger in 12 years - Lundy describes the market’s rise from its 2012 bottom in yen terms. Corporate governance code timing: 2004, 2014, 2015 - He references the TSE code in 2004 and Japan’s stewardship/corporate governance codes in 2014 and 2015. Japan market inflows in first half of 2023: 4.5 trillion yen - Lundy says foreign inflows were the biggest in almost 10 years. Japan market outflows in second half of 2023: 1.5 trillion yen - He notes some reversal after the strong first-half inflows. Prior multi-year outflow comparison: 3 trillion yen did not cover half - He says the recent inflows were still not enough to offset the prior five years of outflows. Warren Buffett holdings: 5 companies - The hosts discuss Buffett’s stake in Japanese trading houses. Tokyo Electron stock move: 10-bagger - The hosts note the stock’s large appreciation after its strategic changes. Corporate crossholdings total: 70 trillion yen last year; probably 100 trillion yen now - Lundy estimates the scale of remaining crossholdings across Japanese companies and financial institutions. Insurance company unwinding horizon: fiscal year 2029 - One insurer says it will eliminate all crossholdings by that date. Carlos Ghosn compensation example: $10 million - Used to illustrate how unusual high executive pay was in Japan.

Pivotal Quotes: "Japan is effectively the world's largest long short fund." — Joe / Travis Lundy: Used to summarize the hidden economic structure created by crossholdings and offsetting equity positions. "We're going to pay out exactly half of our earnings." — Travis Lundy (describing Tokyo Electron): Illustrates the shift toward explicit shareholder-return policies. "I know I can do the right thing." — Travis Lundy: Describes the newer corporate mindset in Japan: less grandiose than the 1980s, but more disciplined and earnest.

Implications: Japan’s equity story is no longer just about cheap valuations; it is increasingly about governance reform, capital return, and evolving investor behavior. Expect continued unwinding of crossholdings, more buybacks, and a slower but durable rerating of quality Japanese companies.