Will Sanae Takaichi remembered as Japan's greatest Prime Minister ?

 

How cost-free 'Sanaenomics' reforms can turbocharge Japan's economy

Since her government's very first cabinet meeting on Oct. 21, Japan's new Prime Minister Sanae Takaichi has instructed her ministers to produce a stimulus package, rumored to be 10 trillion yen (about $65 billion) or more. This will require a supplementary budget. So far, abolition of the provisional gasoline tax, support for electricity and gas bills, and tax breaks for capital expenditures are being considered as key parts of the plan.

Takaichi also recently chaired her first meeting of Japan's growth strategy headquarters, charging her ministers with refining strategies and formulating a public-private investment road map to boost growth and reduce supply chain risks across 17 key industries and technologies.

The remit spanned areas such as artificial intelligence, semiconductors, shipbuilding, nuclear fusion, quantum technology and biotechnology. Cabinet ministers were put in charge of devising a growth strategy for each one.

It was good to see quick leadership in action. However, almost all of the policies proposed so far will cost significant tax money, almost certainly over several years.

In the past, Takaichi has also rightly emphasized the need for Japanese companies, rather than the government, to reinvest more in growth. She has urged firms to channel much more of their excess cash into expansion, R&D or wage increases. She has even gone so far as to engage in a bit of saber-rattling by suggesting a tax on surplus cash and deposits.

She is on target with these views. Reinvestment of excess cash would stimulate economic growth through far more efficient capital allocation, while further invigorating Japan's still-undervalued stock market. Many Japanese firms are sitting on mountains of cash that earn virtually nothing. Many also have noncore assets that are underutilized and could be sold for even more cash to be funneled back into the economy. Overall, Japan is not lacking in cash and investable assets. The problem is that many of them are in the wrong place.

Executives tend to reinvest their excess cash -- and in the right businesses -- when their boards urge them to do so. Boards, in turn, tend to act when shareholders demand changes, and there are enough independent directors sitting on them. Based on this logic, the third and most enduring "arrow" of Abenomics was the adoption of the Corporate Governance Code (CGC) in 2015. Takaichi herself was a leader in the ruling Liberal Democratic Party's growth strategy committee that included this major step, which has had huge continuing impact.

The CGC required boards to include at least two independent directors and to listen more closely to shareholders, who were in turn encouraged to sign Japan's new Stewardship Code, which committed them to proactively engage with firms and vote proxies objectively. Engagement with investors who analyzed and compared companies was the "other wheel of the cart" that my memos referred to when I seeded the governance code concept with key parliamentarians in 2013.

The CGC's "multiple independent directors" -- or even one-third of the board for firms listed on Tokyo Stock Exchange's Prime market, per the CGC's 2021 revision -- are not enough. Even so, many Japanese companies have started to improve their governance practices over the past 10 years.

Japan's new Prime Minister Sanae Takaichi poses during a photo session with members of her cabinet in Tokyo on Oct. 21.    © Reuters

However, effective investor engagement and efficient comparisons between companies remain hampered by a confusing array of no fewer than three different legal governance structures available to listed firms.

Investors have to spend excessive time keeping track of each company's governance structure, confirming the way it has been implemented, and ascertaining the unstandardized, firm-specific practices each firm has layered on top of it.

This year and next, the Ministry of Justice's Legislative Council will discuss revisions to the Companies Act, and the Financial Services Agency will revise the Corporate Governance Code. This presents an ideal opportunity for the government -- led by the prime minister -- to push through three key reforms that would excite investors, improve their engagement efficiency and stimulate reallocation of cash to productive uses.

First, begin consolidating the three legal corporate governance structures available to listed companies into a single, unified system with practices that are more standardized, while also requiring a single type of annual financial report rather than the two duplicative reports now mandated.

Second, require listed companies to amend their articles of incorporation so that annual general meetings can be scheduled beyond the current three-month window after fiscal year-end -- which, for most firms closing on March 31, would mean being able to hold them in July or August. This would end the so-called shuchubi (concentration date) problem, where the vast majority of AGMs are all scheduled at the end of June (many on the exact same day), making it impossible for shareholders to attend many of them. Investors have been complaining about this for decades.

This would also enable companies to submit annual financial reports much earlier than just days before (or, embarrassingly, even after) their AGMs, as is now common practice. For investor engagement and proxy voting to be meaningful, securities-law financial reports must be filed at least one month before the AGM -- and never after it.

Third, bring Japan into line with the global standard for developed markets by requiring that a majority of board members of listed companies be independent directors. With the FSA now revising the CGC, this is the right -- and perhaps only -- moment to make this crucial leap. The next opportunity may not come for many years. Investors would welcome this move, which would place accountability squarely in the court of the outside directors, forcing companies to improve their quality and diversity of their boards.

As was the case with the CGC, reforms of this scale cannot be initiated by bureaucrats alone. Political leadership from the prime minister's office, and consensus-building among key parliamentarians, is essential. For civil servants, such changes carry too much career risk to champion independently.

Takaichi now has a unique opportunity to catapult Japan's corporate governance reforms into their next transformative phase. Seizing this opportunity would truly be in keeping with the "sense of urgency" that she has called for in her  recent comments.