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Japan Inc. turns away from equity financing

Investors in Japanese companies are increasingly attentive to capital efficiency.

TOKYO -- Corporate Japan has slammed the brakes on issuing shares in the face of growing scrutiny of capital efficiency. Instead companies are raising money for growth via cheap debt, thanks to ultralow interest rates.

Slimming down

In the first six months of 2016, listed companies issued 30.5 billion yen ($302 million) in shares in public offerings. That tally, down about 90% from the same period last year, is the lowest since 1998 -- when the stock market was in a slump after the collapse of major brokerage Yamaichi Securities and Hokkaido Takushoku Bank.

Companies are also buying back shares from investors, to slim down their capital on hand. Mobile service provider NTT Docomo has announced a 500 billion yen repurchase program. "We wanted this large size to improve capital efficiency," said Chief Financial Officer Hirotaka Sato.

Nissan Motor has said it will repurchase up to 400 billion yen in shares.

Repurchase programs announced in the January-June period totaled 4.22 trillion yen -- the most since the first half of 2003. Some 2.48 trillion yen of this has been implemented. Subtracting the amount of new shares issued, capital held by companies shrank by more than 2.4 trillion yen.

In fiscal 2015, stock repurchases amounted to a record of over 5.3 trillion yen. Capital held by publicly-traded companies -- excluding Japan Post group, financial institutions and some others -- decreased by around 8 trillion yen. This marked the first annual decline since fiscal 2008, when corporate profits took a hit from the global financial crisis.

Last fiscal year, in addition to massive losses incurred by general trading houses, many companies purposefully streamlined capital -- so the implications are different than from in 2008.

Last year's new corporate governance code steers companies toward enhancing capital efficiency. Nowadays, no company can remain idle on efforts to improve capital efficiency and profitability. When a company piles up too much capital in relation to profit, the return on equity -- a key profitability indicator -- declines. Many companies with low ROEs faced opposition from investors this year on reappointing their presidents.

Affordable debt

Having built up capital cushions over many years for financial stability, Japanese companies have ample room to cut capital on hand in the interest of higher efficiency. And now they have an option to raise money via exceptionally favorable debt options brought about by the Bank of Japan's negative interest rate policy. Debt is booked as a liability -- so the money raised does not mean more capital on the balance sheet.

In the January-June half, Japanese companies issued 3.89 trillion yen in bonds, up 7% on the year. Issuance of ultralong-term bonds with over 10 years to maturity came to 505 billion yen, the most in 18 years. Carrying greater risks for investors, such bonds normally have higher interest rates. But the negative rate policy has led to low rates for these bonds.

In February, West Japan Railway issued 40-year bonds -- becoming the first private-sector Japanese company to do so. The money, raised for an interest rate of 1.575%, will go to beef up railway safety and for redevelopment projects around stations.

With interest rates sliding even further, East Japan Railway on Thursday issued 40-year bonds at a rate of just 0.5%. Even with such meager returns, the bonds offer better yields than Japanese government bonds, whose yields have dipped to negative territory for notes of up to 20 years to maturity.

"Supported by tenacious demand from investors, issuance of ultralong bonds will keep increasing," projects Hajime Suwa, head of debt capital markets at Mitsubishi UFJ Morgan Stanley Securities.

Subordinated bonds and subordinated loans -- which carry the characteristics of both equities and bonds -- are also being used in fundraising. For example, Mitsui & Co. raised 350 billion yen in June via a subordinated loan. Such instruments do not add to capital on the books -- though they do affect a company's credit assessment by rating companies.

For a company to fundamentally strengthen earnings potential, aggressive investment is essential. Toyota Motor is among those taking such action. The automaker plans investment of 1.35 trillion yen this fiscal year against the headwind of a stiffer yen.

Japanese companies held total capital of 109 trillion yen at the end of fiscal 2015. Whether they can properly use that money for growth investment is key, says Masanobu Kaizu, senior research fellow at the Nomura Securities Financial & Economic Research Center.


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