TSE Cash Markets

Following the Tokyo Stock Exchange‘s request at the end of March for stock price-conscious management, listed companies began actively disclosing their response policies. According to Tokyo Stock Exchange filings by 180 major firms, 30% of the major firms have declared earnings improvements to shareholders, including disclosure of return on equity (ROE) targets. The sustainability of the Japanese stock price rise will increase if there is a clear change in the attitude of corporate managers.

The Tokyo Stock Exchange requires listed companies to include a response plan in their corporate governance (CG) reports. Human Resources Governance Leaders, an advisory firm, checked the CG reports of the Nikkei 225 companies whose fiscal years end in March, and found that 184 of them had already filed their reports as of July 26. Fifty-three companies (29%) disclosed their initiatives and policies in response to the Tokyo Stock Exchange‘s request.

In its most recent CG report, Murata Manufacturing indicated plans to improve profitability. The explicitly stated goal is “return on invested capital (ROIC),” which is an useful measure of a business’s return on capital. It aims to achieve more than 20% through productivity improvements at manufacturing sites.

The company estimates the “cost of capital,” the return demanded by shareholders, to be 7.5%. The actual ROIC for fiscal year 2022 reached 14.6%, which is above the cost of capital, but management believes there is room for improvement. The market also appreciates this attitude, and the PBR (price-book value ratio) hovers in the 2x range.

In the CG report, Mitsui indicated its goal of a three-year ROE average of at least 12% through the fiscal year ended March 2026. The person also explained that it has introduced an executive compensation system linked to ROE and other factors so that director is motivated to improve capital efficiency.

Casio Computer and Osaka Gas explained in the CG report that the Board of Directors had analyzed the current situation and discussed and formulated a plan. As a board of directors, the company is involved in the company’s measures to increase shareholder value and has demonstrated to investors that it is responsible for achieving this goal.

The Tokyo Stock Exchange called on all of the approximately 3,300 companies listed on the “Prime” and “Standard” markets to be aware of their cost of capital and stock prices. Specifically, they were required to analyze their cost of capital, return on capital, market valuation, and other factors, and to disclose to investors (shareholders) in an easy-to-understand manner their initiatives for improvement.

The CG report is a document that describes the company’s efforts and objectives with regard to corporate governance. Listed companies submit their reports annually to the Tokyo Stock Exchange, where they are available for inspection by anyone. It has attracted attention from investors as a material for analyzing how each company deals with the stock market.

Many companies indicated plans to improve indicators related to profitability and shareholder returns. ROE was the most commonly employed indicator (77%), followed by ROIC (36%) and dividend payout ratio (36%).

The market is highly interested in companies with a P/B ratio (price-book value ratio) of less than 1x. The Tokyo Stock Exchange, in its request, referred to a price of less than 1x as “One indication that growth potential is not fully appreciated by investors” and strongly urged improvement. The format of the improvement plan is open-ended, but it requested that the location of the disclosure and other information be included in the CG report.

Concordia Financial Group, which owns the Bank of Yokohama and other companies, has a P/B ratio in the 0.6x range, below the guideline of 1x. The company analyzed that ROE below cost of capital was a factor of less than 1x, and said that it would review its business and reduce expenses as measures to improve the situation.

More companies are expected to declare their management conscious of stock prices in the future. Nissan Motor announced the following response to the Tokyo Stock Exchange request, “I’ll mention it when I announce my next medium-term business plan.”

Five months have just passed since the end of March, when the Tokyo Stock Exchange made the request, and some companies are still analyzing the current situation and considering the content of their public announcements. Keishi Yagi, Deputy General Manager of Mizuho Trust & Banking’s Corporate Strategy Development Department, sees it, “Disclosure will increase gradually after the fall.”

The Nikkei Stock Average is far from reaching a new high after marking 33,753 yen on July 3. In addition to disclosure of corporate goals, overseas long-term investors are looking for execution. If companies are less likely to “leave word” through disclosure in CG reports, confidence in their targets will increase, and this will attract foreign money.