Foreign ownership of equity in Japan continues to build on the back of an increasingly shareholder-f...
Foreign ownership of equity in Japan continues to build on the back of an increasingly shareholder-friendly investment climate, according to fund managers.
The rise of foreign ownership, which reached an all-time peak last year, has followed the decline of cross shareholding between Japanese companies. This practice has come under increasing pressure in recent years and is seen as a touchstone of improving corporate governance by overseas investors.
The increase can also be attributed to a growing spirit of innovation, which has prompted the creation of the Market for High Growth and Emerging Stock, also known as the Mother's Market, to promote fledgling tech start-ups and the promise of Nasdaq Japan for later in the year. These are signs, say Japan fund managers, of a sea change in Japanese trading and investment opportunities for foreigners.
Natasha Chetwynd, head of Japanese equities at Britannic Asset Management, says: "Last year was a record year for foreigners buying Japanese equity with inflows of £54bn."
She believes the availability of equity has been boosted by the decline of cross ownership.
"Certain Japanese corporations have been selling a substantial amount of Japanese equity and free floats are growing, so the volumes being traded are higher then they ever were," says Chetwynd.
"That implies there are more shares traded on the market rather than being locked up on balance sheets."
This is set to increase with the prospect of accounting changes to be introduced in April 2001, which would force corporations with cross holdings to list them on balance sheets at market value rather than at purchase price, Chetwynd adds.
This will introduce a new element of risk on their balance sheets and could also pressure companies to sell.
Changes in banking philosophy are also reducing their participation in the culture of cross ownership holdings. Banks are now pressuring companies to sell assets to service debt.
Andrew Rose, fund manager on the Japan desk at Schroders, says: "Foreign ownership troughed at 4.1% in March 1988, and at that time foreigners were net sellers, but last year it was nearer to 15% with foreigners being the biggest net buyers.
"The cross shareholdings reached their peak in 1991 at just under 52%, and have gone down every year since, and at the end of 1999 it was just under 40%. It has been declining at a rate of between 1% and 2% every year, and in the recent past that rate seems to be accelerating."
He thinks the new Mother's Market, which is struggling as investors continue to treat internet IPOs with suspicion, and the planned Nasdaq Japan, would initially offer very few opportunities for foreign investors because the companies listed would be too small to interest institutional investors.
The Mother's Market was set up by the Tokyo Stock Exchange to pre-empt Softbank's plans to establish Nasdaq Japan in June 2000. Nasdaq Japan aims to mirror Nasdaq in the US. The Mother's Market also provides small tech start-ups with a way around the stringent requirements of the traditional Japanese markets.
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