Japanese Companies Are Making Big Promises to Boost Their Stock Prices
Many stocks trade below their book value, which Tokyo’s exchange finds unsatisfactory
Japanese companies, long viewed as moribund, are trying to change how investors think about them by promising better growth, governance and returns.
Snack maker Calbee said earlier this year that it had been hampered by a “conservative, inward-facing corporate culture and weak ability to effect change.” The 74-year-old company has pledged to revamp its business and boost its profits.
Ajinomoto, the monosodium glutamate and seasonings maker, plans to triple its earnings per share by 2031. That will involve a “dramatic expansion through business-model transformation,” the company said. Nissan Motor recently increased its annual dividend and plans to up it again. The automaker’s chief executive said the company has an urgent need to improve its price-to-book ratio, which is well below 1.
The pronouncements came after a push from Japan’s largest stock exchange—heeding longtime pleas from investors—for companies to pay closer attention to their market valuations and increase shareholder returns.
Japan’s economy is growing, and its stock market has surged this year. But many of its biggest companies aren’t efficient in how they use capital.
In March, the Tokyo Stock Exchange told most of its listed companies to develop, lay out and implement improvement plans. It noted that around half the companies on its main board were trading below their book value, meaning they were worth less in the market than the sum of their net assets.
In the U.S., price-to-book ratios aren’t typically used as a valuation metric for most stocks. Investors generally prefer to look at companies’ price-to-earnings ratios, except in the case of certain sectors, such as banks and other financial institutions.
The large number of Japanese stocks that trade below book value indicates “issues in terms of profitability and growth potential,” according to the exchange.
The benchmark Nikkei 225 is up 21% this year after hitting its highest level in more than three decades earlier in the summer. The market has benefited from a vote of confidence from American billionaire Warren Buffett, a weak yen and large inflows from global investors that had previously neglected the world’s third-largest economy. Some investors that have turned bearish on China have also moved money into Japan.
In May, camera maker Nikon’s finance chief, Muneaki Tokunari, said improving the ratio is “an important management challenge,” and the company needs to quickly find new sources of growth. Its price-to-book ratio topped 1 in June, thanks to the market rally, but has since dropped back to 0.84.
“Even though it has fallen below 1.00 again, we believe that quickly launching growth businesses and securing steady earnings at the moment are important issues for the time being,” a Nikon spokesperson told The Wall Street Journal.
Honda Motor said in May it expected to spend up to $1.4 billion repurchasing shares in the current fiscal year, which ends in March 2024. Its stock has soared nearly 50% this year. Toyota Motor said in May it would buy up to $1 billion in shares.
Companies in Japan are more likely to step up when their rivals are taking action, investors say. “People start to follow suit based on external peer pressure,” said Shuntaro Takeuchi, a Japan portfolio manager at Matthews Asia.
There has been a lot of focus on the price-to-book ratio, but it isn’t the only metric companies can use to prove themselves, said Hiromi Yamaji, chief executive of Tokyo Stock Exchange operator Japan Exchange Group.
“If they would like to use other indicators like ROE or RAROC or ROIC, we don’t care,” Yamaji said in an interview, referring to return on equity, risk-adjusted return on capital and return on invested capital. It is up to companies to communicate it to investors, he added.
Contacting some companies’ investor-relations departments in the country used to be a laborious affair for Hisashi Arakawa, the deputy head of investment management for Japan at Abrdn. He said he had to first arrange a meeting through a broker and in some cases wait for a few weeks—or not secure a meeting at all.
“If you just gave them ad hoc calls, they wouldn’t answer. But now we can call them any time,” Arakawa said.
“Every company that we hold that’s below book—they want to do something,” he added.
Better governance was a pillar of the late Prime Minister Shinzo Abe’s economic-revival program, with a corporate-governance code going into effect in 2015. But share prices were an afterthought for many Japanese companies, said Kei Okamura, chair of the Asian Corporate Governance Association’s Japan working group.
“A lot of the reforms in the past were on corporate governance, which is absolutely critical…but it never really addressed the key issue with respect to why Japanese valuations continue to be discounted relative to global developed-market peers,” said Okamura, who is also a portfolio manager at Neuberger Berman.
While the price-to-book ratio has been gaining prominence, it is an imperfect metric to assess Japan’s corporate health, market participants say. It also isn’t a good proxy for identifying investment opportunities, said Dan Carter, an investment manager for Japanese equities at Jupiter Asset Management.
“A business can have a price-to-book ratio of 0.9 and be too expensive,” Carter said. Capital-intensive businesses can be unduly scrutinized, he added. Banks, for example, often have a price-to-book ratio below 1 due to their large capital reserves.
Japan’s market reform has been effective in bringing about changes, but much more needs to be done to improve profit margins, said Nicholas Smith, a Japan strategist at CLSA. Compared with the U.S. and Europe in this regard, “Japan is a long way behind,” he added.