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At some point in the next few weeks, there will be complaints that foreign purchases of Japanese stocks are not as active as they were earlier in the year. Some might say that the easy money has already been earned. Some might even announce that the “Japan is back” festivities are over.
But after eight years of doing more harm than good to Tokyo’s image in financial markets, Toshiba could offer a final, self-sacrificing departure gift as it prepares to make Japan’s biggest-ever acquisition and embark on a landmark delisting.
Excitement in the Japanese market has indeed calmed down after a frenzied few months, but not yet catastrophically. Starting in late March, fund managers who had been underweight in Japanese portfolios for years, fascinated by the prospect of accelerated corporate change, a permanent devaluation of the yen and a broad withdrawal of investment from China, suddenly became interested again.
Foreign investors have bought a cumulative $77 billion worth of Japanese stocks since the end of March, pushing the benchmark Topix index up 20.6 percent this year. They haven’t bought at this pace or with sustained conviction since the boom of the early months of the “Abenomics” era a decade ago. Respondents to a Bank of America survey of global fund managers last week said their allocation to Japan was the highest in almost two years.
But the pace of foreign buying has slowed as usual this summer and, for technical reasons, will almost certainly reverse into a severe net-selling phase in September, as hedge fund managers make an annual tax-efficient divestment. Shares held before the interim dividend period.
Buying always rebounds sharply shortly thereafter as funds buy back shares from the nominees who held them, but there comes a time every year when the market narrative shifts into pessimistic mode and the challenge for brokers is always how to Let the stock recover. from that.
This year, the stakes for that effort will be even higher, given how the Japanese market has performed so far. Brokers are already starting to worry that in order to maintain the momentum beyond September, they need to point to some convincing catalysts to keep the market revaluation on track. China’s economic woes, Japan’s export problems and other factors mean there are fewer obvious factors that are easy to touch.
Here comes Toshiba, out of the blue: The troubled industrial conglomerate has endured a joyous drizzle since 2015 that has included accounting scandals, a near-bankruptcy and the bitterest fight with shareholders in Japanese history . The company’s chairman recently described the ordeal as an “eight-year tunnel,” but at least the exit is in sight. A consortium led by the Japan Industrial Partners fund and backed by Japan’s largest bank has approved a 2 trillion yen ($14 billion) tender offer for the company, with little sign that it will not succeed.
That’s because a sizable portion of shareholders are eager to sell. One of Toshiba’s biggest problems (besides business restructuring) is that it prompted Goldman Sachs to issue 600 billion yen in new shares to investors at the height of the financial crisis in late 2017. With the emphasis on speed, Goldman’s solution was to sell the placement to a foreign hedge fund and add a string of notorious activists to Toshiba’s once-quiet shareholder roster.
Over the next few years, these funds (still including Effissimo, Farallon, 3D, and Elliott) put enormous pressure on Toshiba to put shareholders first and to make acquisitions. This process, and the arrival of the JIP bid, took much longer than anyone expected, but it became the only viable exit method for larger holders, so they had to be patient. The initial placement in 2017 priced the shares at 2,682 yen; JIP offered at 4,620 yen. The funds made money, but didn’t steal it as much as they’d hoped.
Now, $14 billion has suddenly arrived in the hands of Japan-focused investors, raising an intriguing possibility for the market: Hedge fund and activist money that has largely been locked up for six years can finally be redeployed to a more consistent Tokyo market return for activism rate higher than in 2017.
The five largest activists on Toshiba’s roster own about 25 percent of the company, or about $3.5 billion, brokers estimate. Of course, not all of this will automatically be redeployed in Japan, but a significant portion of it will likely find its way onto the registers of dozens of other Japanese companies, where activists could see a path to quicker returns. All of Toshiba’s biggest activists have dedicated Japanese teams and have made it clear that they still see this as a market of opportunity.
But even outside of activists, Toshiba’s release of large amounts of yen into the hands of many existing investors could provide a strong buying catalyst for the final months of the year. Toshiba may be out, but Japan is at least likely to recover longer.
leo.lewis@ft.com
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