Transcript: Activist investors give Japan a wake-up call

This is an audio transcript of the FT News Briefing podcast episode: ‘Activist investors give Japan a wake-up call’

Sonja Hutson
Good morning from the Financial Times. Today is Thursday, January 2nd. And this is your FT News Briefing. The UK is struggling to clean up illegal crypto ads. And in Japan, a wave of activist investors have got boardrooms to sit up and pay attention. Plus, the FT’s Martin Wolf sits down with the European Central Bank president, Christine Lagarde.

Christine Lagarde
I think, Martin, we’re getting very close to that stage when we can declare that we have sustainably brought inflation to our medium term, 2 per cent. But I think we need to be cautious.

Sonja Hutson
I’m Sonja Hutson, and here’s the news you need to start your day.

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The UK’s crackdown on illegal crypto ads isn’t exactly going to plan. Between October 2023 and 2024, the Financial Conduct Authority ordered more than 1,700 illegal promotions to be taken down, but only half of the ads actually work, according to figures obtained by the FT. On top of that, the FCA hasn’t penalised any of the companies that failed to remove them. This is all despite a new law that requires crypto ads to get FCA approval or face, quote, robust action, like criminal prosecution or fines. People with knowledge of the process, however, said it takes time to prepare for those.

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2024 was a record year for shareholder activism in Japan. More funds than ever pounced on Tokyo’s stock market, buying up stakes in companies and demanding big changes. The FT’s Leo Lewis has been following what this disruption means for Japanese businesses moving forward. He joins me now from Tokyo. Hi, Leo.

Leo Lewis
Hello there. Hi.

Sonja Hutson
So walk me through this big year for shareholder activism in Japan. What’s been happening?

Leo Lewis
So what we’ve seen is an increase both in the number of activist funds that are engaging with Japanese companies, the number of companies that have been targeted by activists, and also a rise in the size of companies. Now they’re taking on pretty much anyone, including some of the very biggest names in the country. And the idea is that in terms of scale, that nobody really is too big to escape the possibility of an activist fund coming in, shaking things up.

Sonja Hutson
Got it. And I’m also curious about the timing here. Why are these investors ruffling feathers right now?

Leo Lewis
So there was a burst of what we probably now describe as shareholder activism in the early 2000s, but encountered very, very serious resistance. The kind of — the establishment of Japan, I suppose, is the easiest way of thinking of it — kind of said, look, we’re not into this and made life very difficult. That shifted quite significantly during that kind of 2013, 14, 15 period when prime minister Shinzo Abe was in power. Japan then got a corporate governance code by which companies were encouraged to conduct themselves, and a stewardship code to make institutions sort of more responsible to their investors. And this all combined really to see a pretty steady increase in the amount of shareholder activism that’s been not only going on in Japan but is just now regarded as part of the scene, as it is elsewhere in the world.

Sonja Hutson
OK. Well, that was a decade ago, right? Why has it really ramped up more recently?

Leo Lewis
There was a long period where Japan was in deflation, where companies were not under the most terrible pressure because interest rates were extremely low because prices were falling. They were not under the kind of pressure that they are now that interest rates are going up in Japan and the country is in an inflationary environment. And so the environment has actually changed. Companies are under a great deal more pressure to run their businesses with a greater focus on kind of cost of capital and other metrics that investors use. And so, yeah, the idea of these companies sort of waking up is an attractive one, I think, to investors who’ve been looking at Japan for a long time and have decided, look, nothing’s going to really shift the kind of big hinterland of Japanese companies. Nothing’s really going to change their behaviour. And now that’s exactly what is happening. And so that complacency that’s lasted for many, many years is evaporating at the moment.

Sonja Hutson
And Leo, just how much do you think activist investors might impact the mood in Japanese boardrooms more broadly?

Leo Lewis
So just towards the end of 2024, we did an interview with Tak Niinami, who is the head of Suntory, but he’s also serving on the Association of Japanese Chief Executives, who have a very influential role in Japan. In this interview, he said, look, Japan’s reached what he called a great tipping point, and he meant that in a positive way, that what he was saying was that there are enough companies that have been kind of targeted by activists to push Japan to a point where Japanese companies are going to have to operate as if they could be targeted by an activist shareholder, even if that hasn’t actually happened yet. And we’ve certainly spoken to people who say, well, look, you know, the fund could end very quickly because there’s always a potential in Japan for a pretty serious establishment backlash. It hasn’t happened this time. And so that’s where I suppose my optimism comes that we are looking at something new.

Sonja Hutson
Leo Lewis is the FT’s Tokyo bureau chief. Thanks, Leo.

Leo Lewis
Thank you. Very good to talk to you.

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Sonja Hutson
More than a quarter of US venture capital firms have become dormant since the industry’s peak in 2021. The financial institutions that pump money into VCs have grown more risk-averse. So now they’re focusing on funding the biggest firms in Silicon Valley. This trend is concentrating power among a handful of mega VCs and leaving smaller firms fighting for survival. It’s also shaken up the dynamics of the US venture market. Big start-ups like SpaceX and OpenAI can stay private for longer and smaller start-ups have fewer funding options.

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The Eurozone seems to have achieved a soft landing after double-digit inflation. But it struggled to recover from the Covid-19 pandemic, especially compared to the US. The FT’s Martin Wolf recently sat down with European Central Bank president Christine Lagarde to talk about this for an episode of the Economics Show. We’re gonna play you some of that conversation now.

Martin Wolf
Do you think that inflation upsurge is now durably over, we could stop worrying about it?

Christine Lagarde
I think, Martin, we’re getting very close to that stage when we can declare that we have sustainably brought inflation to our medium term, 2 per cent. I’m saying that with a little reservation because I still believe that we should be very vigilant about services. You know, inflation, the latest reading we have is 2.2 per cent. But services is still 3.9 and not budging much. It’s been hovering around 4. Slightly declining now, and some of the underlying inflation figures and measurements that we have are moving in the right downward direction. But I think we need to be cautious and vigilant on three accounts. One is wages. Obviously, there has been a catch-up. There was lag time between price increases and wages increases. I think we’re coming close to the end of that process where wages have caught up with prices. The second element: profit. Profits have been high and probably higher than average for a period of time. And right after Covid, they have now declined significantly, and we attribute that to the buffering role that they play with wages. So wages increase, profits are reduced and absorb the additional cost of labour. As a result, the push-through to prices is not happening in the way it did. The third element — which is a bit more peculiar — is what I call the latecomers, which I hope will not be the late leavers. By latecomers, I’m referring to sectors like insurance. Insurance contracts, for instance, are renewed on an annual basis. So they are renewed, say, in January of each year. They were significantly increased in January 24th, because there were latecomers to the party of price increases. I hope they will not be the late leavers and they’re not going to renew the significant increase that we saw last January.

Martin Wolf
Yes, let’s look a little bit more at this very significant episode of higher inflation, which of course affected all the world and certainly all the developed world to very similar degrees. The inflation performance has been quite similar to the US, but the growth performance of the US has been much, much stronger. To what do you attribute that divergence during this inflation period? Did the Europeans, the Eurozone and the British, too, make macro policy mistakes of some kind? Should we have followed the Americans with huge fiscal deficits? Was that the right way to go?

Christine Lagarde
I would attribute the significant difference between US growth and European growth to two things predominantly. One is energy.

Martin Wolf
Of course.

Christine Lagarde
Energy prices have gone up across the world, but because we are not energy producers, it’s a tax that we were paying to the rest of the world, those who produce energy and from which we import it. So that’s number one. It wasn’t the case of the US. In the US, prices went up, but prices were paid out at home. So it was a redistribution effect that took place, but it didn’t leave the country. Number two, we had in Europe a lot of those furlough schemes. We kept businesses afloat that would otherwise have drifted or sunk. In the United States. They paid out fiscal support and that was regarded by many households, for instance, as additional revenue, which was then spent and stimulated demand, probably more so than the furlough schemes and indemnification that we had in Europe. And the size of it all in terms of discretionary fiscal support was far higher in the US. But that’s also the privilege of being the largest and to have the dollar as a currency.

Martin Wolf
It would have been risky for the Eurozone.

Christine Lagarde
It would probably have been.

Martin Wolf
Or at least riskier.

Christine Lagarde
Riskier. Yeah. Yeah. Yeah.

Sonja Hutson
That was European Central Bank president Christine Lagarde speaking with the FT’s chief economics commentator, Martin Wolf. You can hear the full interview on the Economics Show podcast. We’ve got a link to the episode in the show notes.

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This has been your daily FT News Briefing. Check back tomorrow for the latest business news.