Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Since simply increasing shareholder returns won't increase corporate value/market cap, it's more natural to present shareholder return policy together with reasonable earnings target, even when such policy is put forth.</li>
<li>In fact, the companies exemplified in the Nikkei article saw share prices rise for companies with positive earnings outlooks and increased conviction that they will meet their medium-term earnings targets.</li>
<li>This is  a more serious and urgent issue for transitional companies, as companies with market cap of less than 10 billion yen in October 2023 will be excluded from TOPIX.</li>
</ul>


Since simply increasing shareholder returns won't increase corporate value/market cap, it's more natural to present shareholder return policy together with reasonable earnings target, even when such policy is put forth.
In fact, the companies exemplified in the Nikkei article saw share prices rise for companies with positive earnings outlooks and increased conviction that they will meet their medium-term earnings targets.
This is  a more serious and urgent issue for transitional companies, as companies with market cap of less than 10 billion yen in October 2023 will be excluded from TOPIX.


The Real Goal of a Company that Wants to Remain in Prime Market Is to Remain in TOPIX

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Index Rebalance

<ul>
<li>The review period for the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> March rebalance ends next week. We highlight the 3 potential inclusions and exclusions for the index.</li>
<li>
<a href="https://www.smartkarma.com/entities/lasertec-corp" target="_blank" data-smartkarma-citation="entities:4126:1" rel="noopener">Lasertec Corp (6920)</a>, <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661)</a> and <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1" rel="noopener">Renesas Electronics (6723)</a> remain our top inclusions, while <a href="https://www.smartkarma.com/entities/toyobo-co-ltd" target="_blank" data-smartkarma-citation="entities:6187:1" rel="noopener">Toyobo Co Ltd (3101)</a>, <a href="https://www.smartkarma.com/entities/nippon-light-metal-holdings" target="_blank" data-smartkarma-citation="entities:1485:1" rel="noopener">Nippon Light Metal (5703)</a> and <a href="https://www.smartkarma.com/entities/toho-zinc-co-ltd" target="_blank" data-smartkarma-citation="entities:2796:1" rel="noopener">Toho Zinc (5707)</a> could be deleted.</li>
<li>Due to the large size difference between the potential adds/deletes, there will be a large funding trade with passive trackers needing to sell over 1x ADV on many index constituents.</li>
</ul>


The review period for the Nikkei 225 (NKY INDEX) March rebalance ends next week. We highlight the 3 potential inclusions and exclusions for the index.

Lasertec Corp (6920), Oriental Land (4661) and Renesas Electronics (6723) remain our top inclusions, while Toyobo Co Ltd (3101), Nippon Light Metal (5703) and Toho Zinc (5707) could be deleted.
Due to the large size difference between the potential adds/deletes, there will be a large funding trade with passive trackers needing to sell over 1x ADV on many index constituents.


Nikkei 225 Index Rebalance Preview (March): Potential Changes as Review Period Nears End

<ul>
<li>METI's survey confirms that "the number of outside directors has increased, but they aren’t completely independent, as they're sometimes appointed by people with ties to the company" isn't incorrect statement.</li>
<li>The reality is that the parent companies of Japan's large asset management companies are financial institutions, and it's high hurdle to vote against proposals by clients of the parent company.</li>
<li>The BOJ is a major shareholder in many companies through its ETF holdings. If the exercise of those voting rights changes, the management of listed companies in Japan should change.</li>
</ul>


METI's survey confirms that "the number of outside directors has increased, but they aren’t completely independent, as they're sometimes appointed by people with ties to the company" isn't incorrect statement.
The reality is that the parent companies of Japan's large asset management companies are financial institutions, and it's high hurdle to vote against proposals by clients of the parent company.
The BOJ is a major shareholder in many companies through its ETF holdings. If the exercise of those voting rights changes, the management of listed companies in Japan should change.


Shortcut to Tension in Japanese Company Management Is Change in Voting Power of BOJ ETFs

<ul>
<li>Japanese companies need to resolve these issues in future, as evidenced by the fact that they have only just begun to resolve issues related to human rights and human capital.</li>
<li>There is risk that less accurate disclosure of ESG initiatives may emerge in future. Attention will be focused on annual securities reports that have mandate to include sustainability-related information.</li>
<li>The slow growth in ROE raises concerns that ESG efforts are not progressing as expected or are being formally mended, but have not improved enough to positively impact corporate value.</li>
</ul>


Japanese companies need to resolve these issues in future, as evidenced by the fact that they have only just begun to resolve issues related to human rights and human capital.
There is risk that less accurate disclosure of ESG initiatives may emerge in future. Attention will be focused on annual securities reports that have mandate to include sustainability-related information.
The slow growth in ROE raises concerns that ESG efforts are not progressing as expected or are being formally mended, but have not improved enough to positively impact corporate value.


If ESG Is Related to Improved Corporate Value, Doesn't Slow ROE Imply Stalled in Real ESG Efforts?

<ul>
<li>Forcing companies to submit ROE targets as measure to counter the fact that half of companies languish below 1x P/B is like a teacher asking students to submit an assignment.</li>
<li>If that motivates the management, good for them. However, in our experience, only a small percentage of students are motivated by the teacher's words and see their performance improve.</li>
<li>If companies are asked to submit ROE targets, they shouldn't simply meet them by changing capital structure through shareholder returns, but should achieve them through investments for future earnings growth.</li>
</ul>


Forcing companies to submit ROE targets as measure to counter the fact that half of companies languish below 1x P/B is like a teacher asking students to submit an assignment.
If that motivates the management, good for them. However, in our experience, only a small percentage of students are motivated by the teacher's words and see their performance improve.
If companies are asked to submit ROE targets, they shouldn't simply meet them by changing capital structure through shareholder returns, but should achieve them through investments for future earnings growth.


A Few Students Were Motivated by Assignments from Their Teachers, and They Performed Differently

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

The Real Goal of a Company that Wants to Remain in Prime Market Is to Remain in TOPIX

I would like to discuss the December 10 Nikkei article titled "TSE Reorganization to be Used for Stock Selection, Focusing on Shareholder Returns...

Metrical Inc

Nikkei 225 Index Rebalance Preview (March): Potential Changes as Review Period Nears End

With a week left in the review period, we revisit the potential NKY changes in March & highlight top add/delete candidates. There will be a large...

Brian Freitas

Shortcut to Tension in Japanese Company Management Is Change in Voting Power of BOJ ETFs

I would like to disscuss the December 28 Nikkei article, "Interview with CG-Net Chairman: "Investors should choose the president" regarding a...

Metrical Inc

A Few Students Were Motivated by Assignments from Their Teachers, and They Performed Differently

I have considered the Nikkei article on December 19, "TSE Opens 'Pandora's Box': Begins Discussing Issues of P/B Below 1x."

Metrical Inc

The Real Goal of a Company that Wants to Remain in Prime Market Is to Remain in TOPIX

I would like to discuss the December 10 Nikkei article titled "TSE Reorganization to be Used for Stock Selection, Focusing on Shareholder Returns...

Metrical Inc

Nikkei 225 Index Rebalance Preview (March): Potential Changes as Review Period Nears End

With a week left in the review period, we revisit the potential NKY changes in March & highlight top add/delete candidates. There will be a large...

Brian Freitas

Shortcut to Tension in Japanese Company Management Is Change in Voting Power of BOJ ETFs

I would like to disscuss the December 28 Nikkei article, "Interview with CG-Net Chairman: "Investors should choose the president" regarding a...

Metrical Inc

If ESG Is Related to Improved Corporate Value, Doesn't Slow ROE Imply Stalled in Real ESG Efforts?

I would like to discussed the December 23 Nikkei article, "ESG ""Growth potential": Room for improvement in investor dialogue and ESG evaluation."

Metrical Inc

A Few Students Were Motivated by Assignments from Their Teachers, and They Performed Differently

I have considered the Nikkei article on December 19, "TSE Opens 'Pandora's Box': Begins Discussing Issues of P/B Below 1x."

Metrical Inc