Asset Allocation Chart of the Month
Japan’s Corporate Overhaul Supports Equities
- Japan’s equity market strength increasingly reflects a structural shift in corporate behavior. Since the introduction of the 2014 Stewardship Code and 2015 Corporate Governance Code, companies have faced sustained pressure to improve capital efficiency and shareholder returns. That pressure intensified in 2023, when the Tokyo Stock Exchange began targeting firms trading below book value, effectively “naming and shaming” those companies with persistently low returns.
- The response has been tangible. Share repurchases have risen to record levels in recent years (as shown in the chart) while dividend payouts have also trended higher.
- At the same time, long standing features of Japan’s corporate landscape, including extensive cross-shareholdings, have begun to unwind, freeing up capital and increasing focus on profitability and returns.
- Importantly, this transformation is still ongoing. Japanese corporates continue to hold substantial excess cash on their balance sheets. Based on Bloomberg data, TOPIX companies hold roughly ¥2.8 trillion in cash and equivalents, or roughly 22% of total assets and 140% of book value. By comparison the S&P 500 companies hold approximately 11% of assets in cash, or about 50% of book value.
- Cross-shareholdings also remain significant and represent another source of potential return. While they have declined, they still account for roughly 30% of listed equity holdings. Proceeds from unwinding these cross holdings have historically been directed toward share buybacks.
- Companies trading below book value face the greatest pressure to improve capital efficiency and offer the most potential for value creation through buybacks. Repurchasing shares below book value allows firms to acquire assets at a discount, increasing the value of remaining shares and often improving returns on equity. Currently, about 36% of TOPIX companies trade below book value, versus less than 2% in the S&P 500.
- Overall, governance reforms have improved capital allocation and shareholder returns. Because these reforms are structural rather than cyclical, they have supported Japanese equities even during periods of macro and geopolitical volatility. Still, elevated cash balances and persistent cross-shareholdings suggest there is significant room for further progress.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA – Vice President and Senior Fixed Income Strategist, and Tim Paulin, CFA – Senior Vice President, Investment Research and Product Management, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800.638.8194 for more information.
A Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/ or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.
The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible. For Index Definitions see: TouchstoneInvestments.com/insights/investment-terms-and-index-definitions
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
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