TOKYO (Reuters) - Japan's Nikkei share average .N225 could double in five years if authorities can push ahead with corporate governance reforms but the country has still long way to go, the head of Hong Kong-based hedge fund Oasis Management said.
Likening the reform process to a marathon, founder and chief investment officer Seth Fischer, who’s an avid runner, said Japan has finished only about five kilometers of the race.
“There’s been progress... and we see momentum. If you made good time in the first 5K, it doesn’t mean that you’re satisfied,” he said. “You’re happy that you made a good time, but you have a long way to go.”
Corporate governance reform -- pushing companies to increase outside board members and encouraging more dialogue between shareholders and company management -- has been a key part of Japanese Prime Minister Shinzo Abe’s drive to revive the economy, along with monetary and fiscal stimulus.
“With better governance, I believe comes increased margins, much more efficient use of balance sheets, which would dramatically increase ROEs (return on equity), which would, I believe, more than double the Nikkei over the next three to five years,” Fischer said.
The Nikkei 225 index hit a near two-year high of 20,318 in June and recently has been hovering above 20,000. But it is still nearly one-half of its 1989 peak of 38,957.
One reason behind the poor performance is Japanese companies’ low return on equity, which stands at around 8 percent.
“We need to get to the global standard of ROEs, which is 15 to 18 percent,” Fischer said. “There’s no reason that we can’t get there. It could happen.”
Oasis Management differentiates itself from more aggressive activist funds by labeling itself “an engaged shareholder” that seeks a more cooperative, rather than confrontational, approach to management.
Fischer said Oasis owns Toshiba Corp (6502.T), the troubled electronic and nuclear conglomerate because he sees limited downside risk after the stock has fallen so much in recent years.
Toshiba’s plan to sell its prized chip business to cover nuclear losses is in limbo due to various complications.
Some investors see Japanese government’s involvement in Toshiba’s restructuring as going against the spirit of corporate governance reform, but Fischer said he wasn’t necessarily troubled by that.
“I‘m a big advocate of shareholder rights obviously and I‘m prepared to spend real money and time on maximizing shareholder value,” he said. “But when it comes to national interest involved, I don’t have a problem with the government doing it.”
Reporting by Tomo Uetake; Editing by Richard Borsuk