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Stocks

Market Scramble: Debt ratio less of a concern in a negative rate world

TOKYO -- Investors increasingly are attracted to companies skilled at using debt to accelerate business growth as borrowing costs continue to march ever closer to 0%, especially after the Bank of Japan's recent introduction of a negative interest rate policy.

     "We receive a lot of inquiries these days" about companies that use debt wisely, a person in charge of Japanese stocks at a foreign brokerage said.

     After lowering their Japanese shareholdings, foreign investors are showing interest in Japan's stock market again. Nissan Motor and Hitachi are among these investors' new Japanese darlings. Their shares gained nearly 3% Friday while the Nikkei Stock Average rose just 0.65% overall to 17,002 points.

     One common thread among these companies is that they are pursuing growth by using both cash on hand and borrowing effectively. Investors normally tend to avoid businesses with high debt ratios, but in the brave new world of negative interest rates debt is less of an issue, since repayments will become easier as rates fall.

     The situation has one foreign investment fund considering a reshuffling of its stock portfolio. The fund will focus on companies that have strong chances to improve their financial health and grow business under a prolonged negative interest rate environment.

     Some investors already appear to have adjusted their stock selection criteria with a similar filter. Japanese stocks with a debt-to-equity ratio above 1 as well as improving earnings have overall outperformed the Nikkei average lately. Goldman Sachs Japan said this phenomenon became pronounced in Japan around mid-February.

     The same thing has been seen in Europe, where a negative rate environment has existed since 2014. As companies with improving earnings can boost their capacity for investment by leveraging debt, they are "more likely to achieve future profit growth or offer better shareholder returns through share buybacks," said Kazunori Tatebe, strategist at Goldman Sachs Japan.

     A good example of such companies is Nissan, whose debt-to-equity ratio stood at 1.3 as of the end of last year. The automaker is on track to set a record for group net profit for the first time in a decade in the fiscal year ending this month, buoyed by strong performance in North America. Nissan said last month it planned to buy back up to 400 billion yen ($3.53 billion) of its shares.

     SoftBank Group also is looking to buy back shares.

     Capital investment and acquisitions take time to produce results. By contrast, stock buybacks can boost shareholder value instantly. If more Japanese companies embrace share buybacks, "it can become an incentive for foreign funds to return to Japanese stocks," said Toru Ibayashi, executive director at UBS Securities Japan.

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