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Japan's stockholder-incentive bubble fizzes up

Retail investors snap up listed companies offering benefits despite inflated prices

Many retail investors gather at an exhibition on shareholder incentives from listed companies, at the Tokyo Stock Exchange on March 24.

TOKYO -- Japan Inc. is on a stockholder-incentive spree, with the number of listed companies implementing shareholder benefit programs continuing to hit record highs.

As of March 29, 1,375 companies, or roughly one-third of all listed Japanese companies, were giving their shareholders their products and other items as gifts under such programs, according to a survey by Nomura Investor Relations.

Shareholder benefit programs are unique to Japan and suitable for the nation's "gift-loving" people. Individual investors particularly snap up shares of companies offering attractive incentives at the end of March, when most listed companies close their yearly books.

While pleasing many retail investors, aggressive shareholder incentives have left institutional investors, who give priority to dividend payouts, increasingly unhappy.

Meanwhile, a growing number of experts are pointing to the negative effects of the shareholder-incentive bubble, such as some stock prices remaining stuck at unreasonably high levels.

Trick to the game

"There is no program that is better than this," a housewife in her 30s living in Nagano Prefecture said about supermarket giant Aeon's shareholder benefit program.

She purchased 100 Aeon shares eight years ago. As a shareholder, she can receive courtesy cards from Aeon that allow her to get a 3% discount on her purchases. She has no intention of selling off her Aeon shares, although the company's stock price has doubled since she purchased them.

"I do my daily shopping only at Aeon. By doing so, I can save about 50,000 yen ($449) annually. It is the best saving method at a time when bank deposit rates are only negligible," she said.

A growing number of listed Japanese companies are offering incentives to secure long-term shareholders like her.

Meanwhile, many individual investors are now resorting to short-term "cross trade" as a trick to get shareholder incentives, effectively for free, while avoiding risks involved in stock price fluctuations.

Listed Japanese companies that close their yearly books at the end of March also determine the rights of shareholders at that time.

While scooping up actual shares of companies offering attractive incentives, many retail investors also engaged in cross trade at the end of March this year to get shareholder incentives effectively for free, selling shares of the same companies in margin trading.

A 50-year-old man living in Tokyo is one of them. "This year, I engaged in cross trade covering 66 issues, including Oriental Land and Japan Airlines, to spend time with my family." Oriental Land operates Tokyo Disneyland and Tokyo DisneySea.

In margin trading, retail investors borrow money or shares from securities companies to buy and sell shares.

The problem is that if a large number of retail investors flock to the same issue, stocks they borrow from securities companies for margin selling run short, resulting in a spike in borrowing fees.

Adores, which operates amusement facilities, is a good example.

The company gives its shareholders tickets for a luxury relaxation salon with which it has tied up. But the cost of acquiring the tickets, which are worth 44,000 yen, has surged to 84,000 yen.

Adores has become an investor darling after a TV program introduced the luxury relaxation salon tickets as a favorite of Hiroto Kiritani, a professional shogi player also well known as a shareholder-incentive enthusiast.

The shareholder-incentive bubble is widespread among Japanese companies.

For example, the cost of obtaining a meal ticket worth 1,000 yen and a 5% discount card offered by Coco's Japan, a family restaurant chain, has soared to 10,560 yen.

A package of fishery products worth 3,500 yen offered as an incentive by Chuo Gyorui, a wholesaler of such products, has also jumped, to 23,400 yen.

Gift-giving culture

Outside Japan, only a few companies offer shareholder incentives. In the U.S., for example, there are fewer than 10 such companies. The U.K. has just over 30 such companies.

Why are shareholder incentives so prevalent in Japan? Many experts cite Japan's gift-giving culture, as exemplified by the year-end gift-giving tradition.

"Unlike in the U.S. and Europe, where individuals invest in stocks primarily via investment trusts, Japanese individual investors are more likely to hold shares directly. That's another major reason," said Tetsuyuki Yoneyama, a visiting professor at Saitama Gakuen University.

Listed Japanese companies' shareholder incentives are worth a total of about 100 billion yen in terms of market prices, a figure equivalent to only 2% of their net profits. But institutional investors are very unhappy with such incentives.

Shareholder benefit programs are designed to target individuals. In many cases, the same incentives are given to holders of only 100 shares and as many as 1 million shares. Unlike dividend payments, shareholder benefit programs are seen as unfair to institutional investors.

An official at Japan Trustee Services Bank, which manages institutional investors' securities, said the bulk of such investors refuse to accept food products and other material goods as shareholder incentives because of the difficulty of storing and disposing of them.

Some experts also point out that the stock prices of companies offering popular shareholder incentives remain stuck at excessively high levels, compared with their corporate value.

McDonald's Holdings (Japan) is a good example. There are many retail investors who continue to own shares of the fast-food chain to receive meal tickets as shareholder incentives. This shores up the company's stock price.

U.S.-based McDonald's is exploring the sale of part of its stake in McDonald's Holdings (Japan), but it cannot find a buyer.

"It is impossible to buy any such stake at the current stock price, which is far from the real strength" of the Japanese company, said an executive at a foreign fund that once considered acquiring the Japanese company.

Amid the ever-intensifying boom in shareholder incentives, their characteristics are also changing. The cash vouchers, including Quo Card, and gift vouchers overtook food products to become the most common incentive category for the first time this year.

The cash vouchers and gift vouchers accounted for the biggest percentage -- 27% -- of all incentives, compared with 24% for food products.

Susumu Nagai, a former official at food maker Kagome who currently serves as an adviser to Mitsubishi UFJ Trust and Banking, warned about the current situation. "They (shareholder incentives) are too often used easily these days, including luring individuals with cash vouchers," he said.

Kagome sparked the current boom in shareholder incentives. Nagai played a key role in introducing the company's shareholder benefit program.

If the shareholder-incentive boom overheats, the stock market will become distorted and companies jumping on the bandwagon will eventually face a backlash.

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