TOKYO -- The tangible results of corporate governance reforms in Japan -- and how that improves return on equity -- will be a crucial factor in the performance of stocks next year, according to a growing number of market players.
The Nikkei Stock Average declined for the fourth straight session Thursday, slipping 0.51% to 18,789 amid a light session as the Christmas holiday begins for overseas investors. Trading value on the Tokyo Stock Exchange's first section was below 2 trillion yen ($16.4 billion) for the second day in a row. Investors already are thinking about strategies for next year.
"Stocks will rise through the lead-up to the upper house election in July, yet will fall afterward," predicts Hisao Matsuura of Nomura Securities, a view shared by many others.
But before making projections for next year, let us recap 2015. Corporate governance took root in Japan this year, with all publicly traded companies now required to submit governance reports. Some of the hottest topics were mechanisms for boards of directors to monitor management, the handling of shares owned for purposes other than dividends or capital gains, and a focus on dialogue with shareholders.
However, many of the corporate governance reports were similar in content. "Stocks were bought on expectations of change this year, but actual changes will matter next year," Keita Kubota of Aberdeen Asset Management said.
Overseas players are especially dissatisfied with how Japanese companies use the cash they have socked away. Though the average return on equity for Japanese corporations has been rising, it remains at the 10% level among components of MSCI's index, below the average for companies in industrialized nations.
Kenji Abe of Merrill Lynch Japan Securities looks for cash-rich companies whose ROE target is substantially higher than the actual return on equity.
For example, Asatsu-DK said this month that it will pay an annual dividend of 248 yen per share. Though the market had projected a dividend of around 50 yen, the advertising agency pressed forward with a payout ratio of more than 200%, following its 571 yen payout last fiscal year. The stock has surged 9% through Thursday since the day after the announcement while the Nikkei average slid 4%.
Asatsu-DK had an ROE of slightly less than 3% last fiscal year, and its target is 8%. Cash and other liquid assets make up almost 20% of total assets. "We will also work to reduce our shareholders' equity as necessary," President Shinichi Ueno said.
Meanwhile, Astellas Pharma seeks to improve both net profit and shareholders' equity -- the numerator and denominator used to calculate return on equity. It aims to boost profit through its decision in November to acquire a U.S. biotech startup for more than 40 billion yen, while buying back 30 billion yen to 40 billion yen of its own shares three times since April.
The government is supporting the companies, having positioned corporate governance reform as a pillar of the nation's growth strategy. In the spring it will begin allowing companies to pay executive compensation linked to ROE and provide directors with restricted stocks that cannot be sold during a lock-up period, among other steps.
These measures could prompt corporate management to care more about shareholders' equity, said Masatoshi Kikuchi of Mizuho Securities.
In any case, investors likely will demand that companies improve corporate governance to boost their value and shield them from market swings.