TOKYO -- Capital efficiency is a hot phrase of late in Japan's stock market, with investors from domestic pension funds to foreign hedge funds looking for companies boosting returns on equity.
Baby goods retailer Nishimatsuya Chain jumped more than 5% Monday after announcing at the end of last week that it will buy back shares.
Investors grew obsessed with shareholder returns in mid-May, when machine tool maker Amada took the market by surprise with a plan to pour all of its net profit into dividends and share buybacks.
But this bold decision is causing headaches for investor relations officials at cash-rich midsize companies, according to market observers. Many have since faced questions at their IR meetings such as: "How far can you increase the total payout ratio (of dividends and repurchases), following the example of Amada?"
Investors indeed appear fixated on finding the next Amada. The 130 trillion yen ($1.26 trillion) Government Pension Investment Fund, concluding that improved corporate governance is a must for lifting performance, began using the JPX-Nikkei Index 400 as a benchmark in April. The index tracks companies meeting certain investor-appeasing criteria, such as higher ROE.
Foreign investors are making similar moves. "These days, hedge funds are increasingly buying and holding JPX components instead of those in the Nikkei Stock Average," says Naohide Une at Goldman Sachs Japan.
This is supported by the performances of the two indexes so far this year. The JPX 400 has outpaced the Nikkei, especially since April.
Companies are feeling the pressure to enhance capital efficiency. Collectively they have set up buyback programs of close to 2.8 trillion yen so far this year, according to I-N Information Systems. That is up around 40% from the full-year figure for 2013 and the highest level in six years. Toyota, NTT Docomo and other big corporations are stepping up repurchases.
The change in approach is transforming Japan's capital market scene.
Amada, the "role model" for this trend, continued its slide Monday, tumbling more than 6% at one point. The decline came after it said at the end of last week that its buybacks are completed. "Short-term money that snapped up shares on buyback news were also quick to get out," says Norihiro Fujito at Mitsubishi UFJ Morgan Stanley Securities.
The biggest reason for a low ROE is low profitability. Corporate top brass must know that only big improvements in the profitability of core operations can keep investors loyal for the long haul.