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Japan's cross-held shares fall below 10% of all holdings

Old zaibatsu ties coming undone as companies look for better returns

TOKYO -- Japan's listed businesses are accelerating away from their traditional practice of cross-shareholdings, in which groups of companies invest in one another to solidify their business ties.

Nomura Securities research shows that the percentage of cross-held shares dropped to 9.9% of all listed shares at the end of 2016 -- falling below the 10% mark for the first time.

The unwinding has been prompted by a government that wants companies to be more accountable to stakeholders. As listed companies find it difficult to rationalize their cross-held shares, they are ditching them.

Companies are also being prompted to take the proceeds from these divestitures and use them to improve their return on assets.

By the end of March, retailer Marui Group had sold 2.17 million shares, or 1.7% of all outstanding shares, in Sanyo Shokai, a clothing apparel maker whose earnings deteriorated after its licensing agreement with upscale British label Burberry expired.

The group's corporate governance report, which notes efforts to enhance corporate governance, explicitly says it will "divest shares for which there is less reason to continue to hold."

The company plans to use the proceeds from the divestiture to make shopping floors more attractive to today's customers. Marui is to reduce the shelf space for clothing, which is increasingly falling out of consumer favor, while showcasing more fancy household items.

Like Marui, big trading companies are also discarding their cross-shareholdings.

Mitsui & Co. booked a net loss for the year through March 2016 as falling commodity prices walloped its resource business. It then sold its entire stake in oil refiner TonenGeneral Sekiyu. In all, it sold 36 million shares, or 9.83% of all outstanding issues. The proceeds from the selloff are estimated to exceed 30 billion yen ($267 million).

TonenGeneral subsequently merged with JX Holdings to form JXTG Holdings.

With the divestiture, Mitsui dissolved a business that sold oil products processed by TonenGeneral.

Companies that used to belong to the same zaibatsu, ostensibly outlawed after World War II, have maintained cozy ties, partly through cross-held shares. But now the heirs of the zaibatsu are selling their shareholdings of one another.

Mitsubishi Corp., a general trading house, has sold some of its stakes in Mitsubishi UFJ Financial Group and Mitsubishi Research Institute. Sumitomo Corp. has sold part of its holdings in Sumitomo Chemical.

Nomura Securities' Kengo Nishiyama said this unwinding reflects the times -- there really is no reason to maintain these ties.

"The meaning of cross-shareholdings has faded during the past years," Nishiyama said, "and some companies are selling stakes even in companies with which they have maintained a business relationship for many years."

The great unwinding is also progressing among contractors, who have typically held shares in listed companies that place construction orders with them. Beginning this fiscal year, through next March, Toda plans to sell about 5 billion yen worth of cross-holdings every year. Nishimatsu Construction, meanwhile, wants to unwind more than 1 billion yen worth of these holdings each year. Both aim to spend the proceeds on real estate development deals and to improve their capital efficiency.

JFE Holdings is speeding up the sale of its strategic holdings specifically to get funding to renew its aging steel-making equipment. In the year through this past March, it reduced its stake in Mizuho Financial Group to 22.6 million shares, down 11% from a year earlier. In addition, it about halved its Mitsubishi UFJ Financial Group holdings to 1.99 million shares. Through these and other divestitures, the company raised 30 billion yen during the fiscal year.

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