The Journal The Authority on Global Business in Japan

Article from the March 9-15, 2015, issue

At a press conference on January 28 at the Tokyo Chamber of Commerce and Industry, Osamu Aoyama, president of business suit retailer Aoyama Trading, unveiled a three-year business expansion program that includes mergers and acquisitions.

He also presented a plan to boost the company’s return on equity, spending 30 percent more than net profit to pay dividends and buy back the company’s shares. “ROE was very much on our minds as we devised our new business plans,” Aoyama said.
The company’s share price shot up 17 percent the following day.

ROE averages around 8 percent among Japanese companies, whereas the figure hovers around 15 percent among US and European corporations. The low ROE has been one reason many foreign investors have steered clear of the Japanese stock market.



Index envy
The JPX-Nikkei Index 400, made up of the stocks of companies whose ROE, earnings performances, and policies toward shareholders are highly rated, was launched in early 2014.

Hoping to be included in the prestigious index, corporate managers began to give more thought to how to use their companies’ capital more efficiently. Metalworking machinery maker Amada, stung by being left off the index, announced a plan last May to offer 100 percent of its net profit to shareholders.

In February last year, the Financial Services Agency devised a Japanese version of the stewardship code, to encourage dialogue between institutional investors and the managers of their investment targets. A growth strategy announced by the government last June called on companies to strengthen corporate governance and bring their ROE in line with international norms.

Shosuke Yasuda, CEO of interior decorating materials marketer Sangetsu, visited Misaki Capital almost every week last fall, quizzing the investment service firm on how his company could improve its capital efficiency. Misaki, which has a stake in Sangetsu, is calling on its investment targets to take active measures to improve their businesses.

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Fiscal years end in March; covers 1,656 companies listed on first section of Tokyo Stock Exchange
* Forecast as of Feb. 16.
SOURCE: Goldman Sachs Japan

The ROE at Sangetsu, which is virtually debt-free, has remained low at just above 4 percent. After lengthy talks with shareholders, Yasuda announced in November that the company will offer a sum equivalent to more than 100 percent of net profit to shareholders.

The sum of dividend payouts and share buybacks by the companies listed on the first section of the Tokyo Stock Exchange was estimated at a record ¥13.4 trillion in the year that ended in March, surpassing the previous high of ¥12.3 trillion in the year through March 2007, according to Goldman Sachs Japan.

The figure looks set to rise in the years to come, the securities company said.

Besides sharing profits with stockholders, an increasing number of listed companies are spending some of the nearly ¥100 trillion they have stockpiled on new capital investment programs and M&As.

Canon, which has some ¥840 billion in cash at hand, aims to spend roughly ¥300 billion to acquire Swedish video surveillance company Axis. “We are constantly on the lookout for M&A deals to further our growth,” said Canon Chairman and CEO Fujio Mitarai.

Automation equipment maker Fanuc, which has more than ¥900 billion in cash reserves, said it will spend ¥130 billion to open new factories in Japan. The company has been under pressure by US activist fund Third Point to buy back shares to benefit stockholders. But instead, it will use its cash to strengthen its core business.

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Defensive turn
Ever since deflation started sapping the Japanese economy of its vitality in 1998, many companies have turned defensive, focusing on cost reduction and sitting on their hoards of cash, thereby deepening the deflationary trend.

The government is therefore trying to change the mindset of business leaders by calling on them to talk with shareholders and have outsiders sit on their boards.

More companies are taking advantage of their strong profits to expand their businesses. The net profits of listed companies are expected to hit an all-time high in the fiscal year ended in March, for the second consecutive year.

The last time Japanese corporations were so profitable was in fiscal 2007. The global financial crisis plunged companies across the board into the red the following year. Even blue-chip companies such as Toyota Motor Corp. and Hitachi, Ltd., as well as major financial institutions, were hard-hit.

Now car and car-parts makers are doing particularly well. Automakers are doing brisk business in North America and other overseas markets. They carried out structural reforms when the yen was strong and are now reaping the benefits of such efforts as well as a weak yen engineered by the Bank of Japan’s aggressive monetary easing program.

Megabanks and other banking institutions have seen their earnings rise markedly. Their net profits are estimated to reach ¥3.47 trillion in fiscal 2014, some ¥1 trillion more than in fiscal 2007, when they were badly burned as US subprime loans went sour.

The forceful comeback of both manufacturers and banks is making up for the weak performance of steelmakers, shipping companies, trading houses, and petroleum companies, which are hurting amid the slowdown among emerging economies and low crude oil prices.

Now that the Nikkei Stock Average is nearing 19,000, market watchers are waiting to see if it will roar past 20,833, the high touched in April 2000 at the height of the information technology bubble.

In those days, investors snatched up shares in major tech companies such as Nippon Telegraph and Telephone (NTT) and Sony Corp., betting on their future earnings.

Although their profits did not catch up with investor expectations, bullish sentiment pushed the estimated price-earnings (P/E) ratios of the 225 companies that made up the Nikkei index to an average of 300, and their price-to-book (P/B) ratio to nearly three.

This time around, the average P/E ratio is about 17 and P/B ratio about 1.4, indicating that share prices are not overvalued.

On a dollar basis, the Nikkei average has since the end of February surpassed the $155 threshold, a high it last touched in 2006. Some market watchers predict this will prompt foreign investors who manage dollar assets to increase their Japanese stock holdings.

While their earnings improve, more companies are seeking to please shareholders and make more efficient use of their capital. The upward momentum of share prices could gather further strength if companies innovate more to come up with popular new products and services.

©2015 Nikkei Inc. Nikkei Asian Review is published by Nikkei Inc.
All rights reserved.

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The net profits of listed companies are expected to hit an all-time high in the fiscal year ended in March.