Activist Boom in Japan Is Upending Long-Short Stock Strategies

The Japanese stock market has witnessed a surge in activist investor activity in recent years, with Japan now ranking as the second-busiest market for activism outside of the United States. This boom in activism is upending traditional long-short stock strategies and presenting new opportunities for investors. In this article, we will explore the factors contributing to this trend and discuss how investors can adapt their strategies to capitalize on this new environment.

One of the key factors driving the rise of activism in Japan is the shift in shareholding structure and the unwinding of cross-shareholdings. Since the late 1990s, the shareholding structure of Japanese listed companies has shifted towards foreign and institutional investors, leading to a more diverse shareholder base. This shift has increased the influence of these investors on corporate governance and decision-making processes, making it easier for activist investors to gain support for their proposals. Additionally, the rapid unwinding of cross-shareholdings has reduced the influence of traditional Japanese corporate groups and banks on companies, opening up opportunities for activist investors to engage with management and push for changes.

The implementation of the Stewardship Code in 2014 and the Corporate Governance Code in 2015 has also played a significant role in fostering an environment conducive to shareholder activism in Japan. These codes have encouraged companies to disclose their cross-shareholding policies and assess the appropriateness of these holdings, leading to a decline in cross-shareholdings. This has made it easier for outside investors to gain support for their proposals. Furthermore, the codes have emphasized the importance of adding value for shareholders, making Japanese companies more receptive to activist demands aimed at enhancing returns. The individual disclosure rules on institutional voting behaviour, introduced in the revised Stewardship Code of 2017, have also influenced the behaviour of institutional investors, encouraging them to engage more actively with companies and voice their opinions.

As a result of these factors, activist demands at Japanese companies have increased significantly. In 2019, a record 54 Japanese companies received shareholder proposals for their annual meetings, indicating a 29% increase from the previous year. This trend is expected to continue, as more activist investors enter the market and existing activists become more emboldened.

Investors looking to capitalize on this trend should consider the following strategies:

1. Engage with management: Activist investors often engage with management behind the scenes to push for changes. Investors should be proactive in their communication with company management to understand their strategies and potential vulnerabilities.
2. Conduct thorough research: As activists focus on engagement behind the scenes, it can be challenging to track their activities accurately. However, by conducting thorough research on companies, investors can infer the success of activists' strategies based on share buybacks and changes in share prices.
3. Monitor regulatory changes: The Tokyo Stock Exchange's "PBR reforms" and other regulatory changes have provided a strong tailwind for activists in terms of demands for efficient financial and management policies. Investors should stay informed about regulatory developments to identify new opportunities.
4. Diversify your portfolio: With the rise of activism, some companies may become takeover targets, while others may face calls to list assets that activists have called non-core. Investors should diversify their portfolios to include companies with varying levels of exposure to activism.

In conclusion, the activist boom in Japan is upending traditional long-short stock strategies and presenting new opportunities for investors. By understanding the factors contributing to this trend and adapting their strategies accordingly, investors can capitalize on this new environment and enhance their returns.