TSE Cash Markets

Stock buybacks by listed companies in fiscal year 2023 exceeded 10 trillion yen for the first time, reaching a record high for the second consecutive year. In addition to strong performance, this is due to the company’s shift toward capital efficiency-oriented management. As a major buyer, it is supporting Japanese equities. As the Nikkei 225 enters correction phase, it will be interesting to see what policies each company will adopt when it announces earnings results, which will begin in earnest this week.

Nikkei’s tally of stock buyback quotas set by listed companies from April 2023 to March 2024 was 10.25 trillion yen, an increase of 9% from the previous year. Cash reserve amounted to about 106 trillion yen as of the end of December last year, equivalent to 10% of the total. The COVID-19 pandemic caused it to fall to 4.83 trillion yen in fiscal year 2020, but it expanded at a rapid pace.

By industry, electrical machinery accounted for the largest amount at 1.41 trillion yen, followed by trading companies (1.25 trillion yen), services (1.15 trillion yen), and automobiles (960 billion yen). Among trading companies, Mitsubishi Corporation has set a maximum acquisition limit of 500 billion yen in February 2024, and Mitsui also set a limit of up to 50 billion yen in October 2023. In automobiles, Honda has set a maximum acquisition limit of 200 billion yen in May 2023.

The size of acquisitions based on the number of shares has also increased. The number of companies with a quota of 5% or more of the number of outstanding shares increased fourfold from the previous year to a total of approximately 160 companies. Nippon Yusen announced a share buyback of up to 17% of the number of outstanding shares (200 billion yen in value). Tokyo Gas and Koito Manufacturing announced share buybacks of 12% (113 billion yen) and 11% (50 billion yen), respectively.

As a background, there is a trend toward greater emphasis on capital efficiency. In March 2023, the Tokyo Stock Exchange requested listed companies to be more conscious of their cost of capital and stock prices. Stock buybacks reduce equity capital, the denominator in the return on equity (ROE) formula and increase ROE even if net income is the same. PBR (price-book value ratio) is likely to improve.

There are many low P/B ratios companies that decide to buy back stock. In fiscal year 2023, a total of 540 firms, or 49% of the total, had a P/B ratio of less than 1x on the business day prior to the announcement date among firms with a stock buyback framework. Approximately 80 companies, or 10% of the 540 companies, have recently resolved their PBR below 1x.

An increasing number of companies are canceling their acquired shares. In fiscal year 2023, a total of 339 companies canceled their own shares, a 12% increase from the previous year and the largest number ever. “It puts to rest concerns that the stock will be diluted” (Tokio Marine Asset Management’s Koji Hashizume, Equity Investment Department manager) Aimed at.

There is also a desire to raise the shares in circulation ratio, which is the listing standard of the Tokyo Stock Exchange. Since the denominator of the shares in circulation ratio formula includes the company’s own shares, the shares in circulation ratio increases when it cancels its own shares. Nissan Shatai canceled about 21.78 million shares, or 14% of the number of outstanding shares. The shares in circulation ratio was 16% at the end of March 2023, which didn’t meet the standard market listing standards (25%).

Many tend to estimate that strong stock buybacks will continue in fiscal year 2024. Chisato Haganuma, chief strategist at Mitsubishi UFJ Trust and Banking Corporation, says, “The profit-return attitude of Japanese companies is increasing, and if high profit margins are secured in fiscal year 2024, the trend toward increased stock buybacks will continue.”

According to the Tokyo Stock Exchange’s trading by type of investors, business corporations were the largest buyers, putting 4,901.2 billion yen in net long positions in 2023. In the first week of April this year, the net long position price was 73.3 billion yen, inside the net long position for the first time in three weeks. With the market sentiment changing dramatically due to factors such as the decline in expectations for a US interest rate cut, it will be interesting to see how much stock buybacks will emerge from the earnings announcements of companies for the fiscal year ended March 31.