59% of Tokyo-listed companies say they are now working to improve their capital efficiency, up from 49% at the end of 2023, shows research by Asset Management One. The rise comes in response to a Tokyo Stock Exchange (TSE) campaign to make Japanese equities more attractive to investors.
The most common steps taken by Tokyo-listed companies in response to the TSE demand for improved capital efficiency are greater use of share buybacks and sales, by companies, of cross-shareholdings in other listed companies.
Asset Management One says that the unprecedented TSE campaign, which began in March 2023, is now having a positive impact on Japanese equity valuations. The Nikkei 225 Index having risen 19% in the last six months,
Investors have long seen management teams at some Japanese listed companies as having insufficient focus on delivering shareholder returns. Widespread use of cross-shareholdings in competitors, partly as a means to defend against M&A approaches, are often seen as a particularly inefficient use of capital.
In late February, four major Japanese insurers sold their shareholdings in each other in response to a direct request from Japan’s Financial Services Agency, the sector’s regulator.
While sales of cross-shareholdings can cause share prices to fall, the expectation from investors is that the cash generated will be used to fund share buybacks. This has prevented share prices from dropping.
Gianni Casella, Chief Investment Officer at Asset Management One International, says: “There has long been a desire from the Tokyo Stock Exchange to increase the attractiveness of Japanese equities to investors. Its capital efficiency campaign has been a major success in that regard.”
“These are signs that there has been a genuine sea change among listed companies in Japan. The TSE has pointed out that even small-caps have been pushing to improve their capital efficiency, not just the largest corporates.”
“The capital efficiency drive has added to the positive effects of a weaker yen, which should lead to higher income from exports. There are also expectations for improved corporate profits as inflation remains well above zero. That combination has contributed to a significant rise in the Japanese equity market in recent months.”
