TSE Cash Markets

Approximately 1,100 companies, or about 70% of the companies listed on TSE Prime, have indicated that they intend to reduce cross-holding stock by the end of March. It increases capital efficiency by selling cross-holding stock, which is unlikely to generate a return on investment. Behind this is Tokyo Stock Exchange’s request, and the unique Japanese corporate practice of holding shares with business partners is breaking down.

Japanese companies have relieved market pressures by becoming stable shareholders through mutual shareholdings. Investors have strongly criticized this practice for its inadequate corporate governance. Nikkei has compiled the financial statements of listed companies (excluding financial companies) for the fiscal year ended March 31, 2023, and found that the number of cross-holding stocks (cross-shareholdings) totaled about 53,500, down only 6% from a year ago. There has been a renewed movement to resolve the issue.

KPMG AZSA compiled the corporate governance reports of companies listed on TSE Prime disclosed by the end of March. 1,348 companies have cross-shareholdings for listed companies, of which 1,095 have indicated a reduction policy. This is about 70% of TSE prime listed companies (1,650 companies). This is 40% more than the number of firms (793 companies) that sold cross-shareholdings in the period from January to December 2023.

As in the Nikkei’s research, NTT declares “We do not and will not hold any shares for the purpose of forming stable shareholders.” Itochu shall be “In principle, we will sell stocks that have not added value in the first two fiscal years or for which we have little confidence that the investment objective will be realized.”

About 90 companies have set specific reduction targets, including timing and amount. Based on the most recent financial statements, if approximately 90 companies sell as targeted, the total amount of sales would be approximately 4.7 trillion yen. The Toyota Motor group is moving forward with unwinding of cross-shareholdings, and Aisin and JTEKT plan to reduce cross-shareholdings to zero in the future. Non-life insurance companies have also been launching reductions in cross-shareholdings.

Many companies have set a reduction target as a percentage of net assets. Twenty-five companies have stated that they will reduce this ratio to 10%, and 16 companies to 20%. Sumitomo Realty & Development held cross-shareholdings of 250.8 billion yen at the end of March 2024 on a book value basis, a ratio to shareholders’ equity of 14%. The company aims to achieve the goal of reducing the rate to 10% or less by the end of the fiscal year ending March 2028, three years ahead of schedule.

Dai Nippon Printing, with cross-shareholdings of 255.7 billion at the end of March 2023, will reduce its ratio to net assets from 20% to less than 10%.

Many companies have started actual selling out. H2O Retailing sold a portion of its Toho stock in April, recording an extraordinary gain of 14.2 billion yen for the period from April to June 2024. Mitsubishi Logistics will sell four individual stocks by the end of September 2024, recording a gain of approximately 11.5 billion yen.

The reason why companies are moving to reduce cross-shareholdings is due to the fact that Tokyo Stock Exchange requires management to be conscious of expected returns (cost of capital) and stock prices. Cross-shareholding is one of the reasons why Japanese companies’ capital efficiency is inferior to that of their Western counterparts.

According to KPMG AZSA, companies with more cross-shareholdings have lower PBR (price-book value ratio) and return on equity (ROE). Companies with P/B ratios below 1x have average cross-shareholdings of 9% relative to net assets. On the other hand, the same ratio for companies with a P/B ratio of 1x or more averaged 4%.

The policy of voting advisory firms to recommend against general meeting proposals of companies with high cross-shareholdings also encourages the reduction of cross-shareholdings.

One of the challenges is how to use the funds from the sale of cross-shareholdings. The focus is also on how to speed up the reduction of cross-shareholdings. It is necessary to attract investors who will become buyer of the sale by strengthening investor relations (IR) and other measures.