TJI Market Newsletter // This Week's Summary //

Fate of Japanese Stocks: In the Hands of Foreigners   

• With foreign investors accounting for upwards of 60% of market trading value and over 30% of total stock ownership, it is not an exaggeration to say that the fate of Japanese stocks is in the hands of foreign institutional investors.
• Yet management of most Japanese companies are at best ambivalent and at worst xenophobic about foreign investors, and are again increasing cross-holdings as well as introducing “poison pill” takeover defenses to protect against unwanted suitors.
• To date, some 460 Japanese companies (some 12% of all listed companies) have introduced poison pill anti-takeover measures. Some 66 or 55% of these companies had ROE lower than the market average of 10%, while 24 had a PBR below break-up value.
• Both foreign and domestic institutional investors have generally voted against such proposals, as well as against non-independent directors. The Japan Securities Investment Advisors Association found that its members voted against proposals in 48% of the companies in which they held stocks, which is up over 2-fold in the last four years. These domestic institutional investors also voted against 30% of the poison pill proposals.
• However, in looking at the 100 or so larger companies that have introduced poison pills and which have continuously been quoted since May 2003, we found that this shareholder opposition has had little impact on the relative stock price performance of the group as a whole. Indeed, the group we tracked has outperformed the Topix since mid-June.
• The out-performance of these stocks seems to reflect the same paradox that often afflicts SRI (socially responsible investment) funds. “Sin” stocks such as alcoholic beverages, tobacco, gambling/gaming or other segments subject to SRI screens often as not outperform SRI-compliant stocks.
• The lesson here is that stock prices have no social or moral conscience, as was demonstrated by the infamous Baron Rothschild quote to “buy when there's blood in the streets, even if the blood is your own."

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