Asia Tea Time - Cup 31 ☕

This week, I write about the Japan Exchange Group, tips on how much cash to hold, and Kakao.

Macro in Asia

Japan stock exchange looks to “name and shame” corporate baddies

The Japan Exchange Group, which runs the Tokyo and Osaka stock exchanges, plans to introduce a “name and shame” regime in order to drive improved corporate governance standards in Japan.

The group hopes this will encourage investors to assign Japanese stocks a higher value.

Why it’s happening

• We all know that Japan is trying to strike while “the iron is hot” given its stock market has been a big winner in 2023. Going big on corporate governance – such as the makeu up of companies’ board of directors – is one way to keep the market momentum going.

• Foreign investors have long seen corporate governance in Japan as poor relative to other developed stock markets. That’s impacted valuations in the Japanese stock market.

• Indeed, the Japan Exchange Group (JPX) highlighted that roughly half the companies listed on its main stock index are trading below the stated value of their assets. Not ideal.

Why it matters

• If Japanese companies can get their act together and start engaging investors by disclosing more information, then perhaps they’ll start attracting higher valuations.

• It’s a great way to get international investors “onside” with the Japan story now that its stock market is setting new highs.

• By publicly naming companies not complying with JPX recommendations, the whole “naming and shaming” is looking to play on companies fears of “losing face”.

What’s next?

• Talk around reform in corporate Japan has come and gone many times without a lot of material change. Maybe this time will be different but definitely watch those disclosures closely.

Tim’s Take 

• So yes, we’ve seen this act before in Japan. Mainly during the “Abenomics” years starting in 2012.

• As one of the “three arrows” of the former Prime Minister’s push to revive the economy, corporate reform was seen as central to the thesis.

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Yet while super low interest rates and fiscal policy helped the stock market, there wasn’t that much progress on the corporate governance front. 

The launch of the JPX-Nikkei 400 Index (an index made up of companies focused on the efficient use of capital and investor-friendly management practices) was heralded as a sign of things to come but the pace of reforms stalled after that.

Indeed, a host of scandals in the 2010s – including a high-profile “cooking of the books” by camera and optical maker Olympus – revealed how far Japan had to go in instilling corporate best practices.

In an amusing (ironic) twist, JPX itself has recently been highlighted as one listed Japanese firm that has a pathetically low number of women on its board – just 13%. That’s less than half the level of global peers and is also below its own listing rule. 

• Ultimately, while the outlook does appear bright for Japanese companies, from both an earnings and geopolitical perspective, on the corporate governance front there’s still ample room for improvement. 

Tim’s money tip of the week

In this environment, the whole “cash is king” argument gets thrown about a lot. It’s understandable why.

With stock markets volatile and lacking any real clear direction, why not just stick all your money into a bank savings account or money market fund yielding 4-5%?

Technically, we should know the answer to that but finding comfort in safety (it’s almost like a safety blanket, isn’t it?) is a very normal emotion. However, it can be damaging to your long-term financial goals.

That’s because your real return (inflation minus interest rate) could just barely be positive over the long term and, once interest rates start to come down (because eventually they will), you’ll have to figure out what to do with the cash.

Remember, we shouldn’t actually be investing any money we need within the next five years into the stock market. Yet over the long, long term, global stocks deliver an annualised return of 9-10%. 

Admittedly, it doesn’t feel like that right now but falling into the trap of holding too much cash will be detrimental to our long-term returns.

So, what’s the ideal level of cash to hold? Lest we forget we need that emergency cash fund so in that, you’d have 6-12 months of expenses in cash. You can park that in a savings account and at least earn something on it.

As for your “war chest” on how much cash beyond that to hold for investing, it’s a very personal decision. Some people have 5% of their portfolio in cash while others can hold up to 15-20% at times.

Either way, it makes sense to put that money to work right away if you’re investing for decades. However what “makes sense” doesn’t always translate into what we actually do.

That’s why coming up with a regular investment plan, such as dollar cost averaging (DCA), can help you utilise your spare cash in a more methodical manner – without having to care what’s going on in the stock market. 

Story of the week

It seems that corporate malfeasance is a global phenomenon – where there’s money to be made there’ll be some companies (or people) trying to profit illegally.

That’s exactly what appears to have happened in South Korea as it was revealed that the Chief Investment Officer of listed Korean company Kakao has been arrested on charges of stock manipulation.

Kakao’s CIO is being accused of buying up 240 billion Korean won (US$178 million) in shares of Korean pop agency SM Entertainment – the firm behind the hit K-Pop boyband BTS – in order to thwart a rival bid for the company.

While the deal was deemed “legitimate” by lawyers representing Kakao executives, it seems like it was anything but.