For over a decade now, Japan has pledged to enact big reforms to get its economy back in the race against China. And with little to show for it. Clearly, hopes that aggressive Bank of Japan easing alone would revive the nation’s animal spirits didn’t pan out.
Yet for all this homeostasis, there are bursts of disruption offering a roadmap for raising Japan’s economic game. One worth exploring is the events at Dai Nippon Printing Co., which recently agreed to its largest ever share buyback.
On Thursday, the 147-year-old component supplier heeded demands from U.S. activist fund Elliott Management, agreeing to buy back a sizable amount of outstanding shares. The news sent DNP shares soaring and heads turning in Japan Inc. circles.
DNP is a smaller target for a team known more for calling for improved corporate governance at the likes of SoftBank and Toshiba. But Elliott’s victory here could have outsized impact.
Viewing DNP as a Japan Inc. diamond in the rough of the first order, Elliott became one of its biggest shareholders. The draw: the conglomerate enjoys a huge and unheralded global share of components crucial in making electric vehicles, smartphones, semiconductors and other hot tech segments.
For Elliott, DNP checks many of the boxes for why a global investor might bet significantly on a Japanese name of which many peers hadn’t heard. It’s cash-rich, quietly holds a commanding presence in global supply chains and its stock trades well below book value.
DNP, for example, produces pouches needed to install lithium-ion batteries in EVs. Its 70% share of the market includes steady orders from Ford, General Motors, Nissan, Renault, Volkswagen and a who’s who of global automakers. The company also is a pivotal provider of “metal masks” needed to make OLED screens that make Apple and Samsung handsets.
Of course, as the name suggests, DNP has a number of business lines that intrigue Silicon Valley or Detroit less. It has large interests in printer ribbons, book printing and food processing. Still, Elliott’s “hidden treasure” argument stands.
It’s proving potentially lucrative, too. This week, Nabeel Bhanji, Elliott’s senior portfolio manager, “commended” DNP’s plan to buy back 30% of its market capitalization and “take other value-enhancing actions.” Bhanji added that the steps “demonstrate DNP’s commitment to addressing the company’s undervaluation.”
Still, sources suggest that Elliott sees DNP as the tip of the proverbial iceberg where great, undiscovered Japanese gems are concerned. At the same time, what Elliott views as a case study in extracting hidden value could be its own blueprint for how to build a more innovative, productive and competitive Japan.
Sadly, when names like Elliott or Daniel Loeb’s Third Point come calling, the Japan Inc. response is typically to circle the wagons.
Look, the gang at Elliott aren’t altruists any more than the folks at Third Point, when it prods, say, Sony to modernize governance. But the pressure they put on Corporate Japan is something of which Asia’s No. 2 economy needs more.
In 2023, foreign an activist funds shouldn’t have to do all the work. A decade ago, the ruling Liberal Democratic Party promised a deregulatory Big Bang to resurrect Japan’s once vaunted innovative spirits.
Sadly, the LDP mostly took the easy route, nudging the BOJ to print trillions of dollars’ worth of yen in place of supply-side upgrades.
There was, however, one area of forward motion: steps to internationalize corporate governance. In 2014, Tokyo imposed a U.K.-like stewardship code of corporate conduct. It encouraged chieftains to give shareholders a bigger voice and increase the number of outside directors.
Progress had been limited. But with DNP, Elliott offers a model for how change can indeed happen in Japan. And to Prime Minister Fumio Kishida, a vivid case study in how to upend the status quo.
Elliott is far from done with DNP. Bhanji’s team is still pressing the company to unwind some real estate holdings and reduce cross-shareholdings in friendly companies. And, in the process, bolster other shareholder campaigns in a nation notorious for battling them.
By May, DNP is expected to unveil a new medium-term strategy to stop investors like Elliott, which is the company’s third-largest external shareholder. The hope is that DNP proves that century-and-a-half old companies can indeed learn new tricks.
The company’s massive cross-shareholding alone—representing more than 30% of total assets—are something of weight around its ankles. DNP has agreed to address this glaring misallocation of capital. Let’s hope DNP does exactly that—and more.
This victory for Elliott—on top of the dividend news—could have outsized benefits for the broader economy. The better companies of all sizes and generations position themselves for the China-centric Asia of tomorrow, the less impediments for yesterday will stymie innovation, profits and wages.
This is the virtuous cycle the LDP has been trying to spark. Early 2000s Prime Minister Junichiro Koizumi tried it. So did 2010s leader Shinzo Abe. Little stuck, though, leaving it to Kishida to give big structural change another chance.
Kishida could do worse than spotlight what’s afoot at DNP as a timely microcosm of Japan’s capacity for reinvention. It hardly matters that foreign fund Elliott got things rolling. What does matter is here’s an example of the kinds of course correction of which Japan needs more.