Japan Stock Exchange adopts name-and-shame regime to boost corporate values

Japan’s stock market is introducing a radical, new “name and shame” regime in order to improve governance and boost valuations.

The Japan Exchange Group (JEG), which controls both the Tokyo and Osaka stock exchanges, said in March it was looking for progress in raising corporate value, a key catalyst to help the country’s market recover the ground that they lost more than 30 year ago.

Hiromi Yamaji is the chief executive officer of JPX. He now intends to make it more clear to investors, which companies have met his goals by publicly naming for the first-time the listed companies who have complied.

“We will update the list each month but the first one will be published in January.” . . In an interview, he stated that this was the plan. “In Japan. . . “Peer pressure or nudges are very effective methods to encourage people to move forward.”

It has been an exciting year for Japanese stock after decades of disappointments to both domestic and international investors. Both the Topix and Nikkei 225 indices have risen by over 20 percent this year.

A weaker yen and the long-dormant rise in inflation are two major factors that have helped companies to raise prices. Global investors are also interested in Japan, as they want to increase their Asian exposure without having to take on the geopolitical risks and regulatory burdens associated with China.

The government and market authorities have taken steps to improve board structures, attract institutional and retail investments and encourage companies to adopt more dynamic strategies.

These efforts culminated in a series of meetings that took place earlier this month between Prime Minister Fumio Kishieda and some of the largest fund managers around the world.

Investors believe that a missing element is a sign that the stock market is really pushing companies to improve governance standards, cost of capital and engagement with their shareholders. This was a guideline, not a requirement.

Yamaji pointed out earlier this year, that about half of the companies listed on the prime index had a price to book ratio less than 1, meaning the market valued them below their stated value of net assets. The exchange will now track companies who have announced plans to follow the guidelines and shame those that do not.

“We will publish the names of companies who have disclosed their identities, but we only have 3,300 listed companies on the standard and prime [markets]”. . . You can subtract. . . It’s not difficult to calculate,” said Yamaji.

The exchange will also publish and canvass the opinions of investors on the actions taken by companies, such as raising dividends, increasing buybacks, disposing non-core assets, or improving communication to the market.

Bruce Kirk, Goldman Sachs’ chief Japan equity strategist, said that a regularly updated list of companies who are complying with the Tokyo Stock Exchange will further bring Japanese corporate governance reform into the spotlight. This will increase pressure in the short-term on management teams that have not yet responded to the request to do so before the end of this year.

David Mitchinson, Zennor Asset Management, said: “This shame-and-name-and-shame approach will increase pressure on the majority of companies.” Only 31 percent of companies have responded formally, so pressure will be high from the shareholders on those that haven’t.

Yamaji pointed out that larger companies with lower price-to book ratios have tended to make faster progress than their smaller counterparts. For companies with a capitalisation greater than Y100bn, the proportion of firms that responded increases to 45 percent.

He warns, however, that he is expecting more: “We’ll continue to insist that our demand does not just apply to companies that are trading below the market price. . . book. “No, everyone is a potential target.”