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>For investors targeting large-cap companies, improvements in ROE and P/B are almost expected. However, for the majority of smaller-cap companies, such improvements have not yet reached a visible level.</li>
<li>Lately, while P/B of companies with low market capitalization is rising, ROE growth remains sluggish. If ROE remains slow, support from BoJ's continued monetary easing policy must play significant role.</li>
<li>It is unreasonable to expect investors to take an interest solely through IR outreach without providing evidence that signals change within the company or convinces investors that change is imminent.</li>
</ul>


For investors targeting large-cap companies, improvements in ROE and P/B are almost expected. However, for the majority of smaller-cap companies, such improvements have not yet reached a visible level.
Lately, while P/B of companies with low market capitalization is rising, ROE growth remains sluggish. If ROE remains slow, support from BoJ's continued monetary easing policy must play significant role.
It is unreasonable to expect investors to take an interest solely through IR outreach without providing evidence that signals change within the company or convinces investors that change is imminent.


Is TSE List Effective? Companies Need to Demonstrate Momentum in Raising Their Capital Profitability

<ul>
<li>The decline in IPOs for small-cap companies was as anticipated. Once the topic of revising the listing criteria for Growth Markets arose, IPOs had to pay attention to new criteria.</li>
<li>For companies planning IPOs, the requirement to demonstrate a commitment to growth during the listing review process has a positive aspect: it'll lead to a decrease in small-scale listings.</li>
<li>Growing companies will move to Prime Market, while those failing to reach JPY10 billion will transition to Standard. Companies maintaining JPY10 billion but without growth may stay in Growth Market.</li>
</ul>


The decline in IPOs for small-cap companies was as anticipated. Once the topic of revising the listing criteria for Growth Markets arose, IPOs had to pay attention to new criteria.
For companies planning IPOs, the requirement to demonstrate a commitment to growth during the listing review process has a positive aspect: it'll lead to a decrease in small-scale listings.
Growing companies will move to Prime Market, while those failing to reach JPY10 billion will transition to Standard. Companies maintaining JPY10 billion but without growth may stay in Growth Market.


Nevertheless, Concern Remain that TSE Growth Market Might Include Companies that Don't Pursue Growth

<ul>
<li>The increase in stock splits reflects a shift toward meeting the needs of individual shareholders of listed companies, occurring as cross-shareholdings decline and the presence of overseas investors grows.</li>
<li>Companies unwilling to increase foreign ownership further use stock splits to boost individual shareholders. Companies with low stock prices use it to meet as a tool of TSE's P/B request.</li>
<li>It has become clear that increasing the foreign ownership is a higher priority than the increased costs associated with the rise in the number of shareholders resulting from stock split.</li>
</ul>


The increase in stock splits reflects a shift toward meeting the needs of individual shareholders of listed companies, occurring as cross-shareholdings decline and the presence of overseas investors grows.
Companies unwilling to increase foreign ownership further use stock splits to boost individual shareholders. Companies with low stock prices use it to meet as a tool of TSE's P/B request.
It has become clear that increasing the foreign ownership is a higher priority than the increased costs associated with the rise in the number of shareholders resulting from stock split.


Companies that Wish to Distance from Facing Shareholders Are Unlikely to Achieve Management Reform

<ul>
<li>BoJ will want to retain discretion regarding ETF sales, so it'll sell flexibly depending on stock market conditions. The sale of ETFs is just the beginning of a long journey.</li>
<li>The shift to inflationary economy has made it easier than before to implement measures to improve capital profitability. Nevertheless, companies whose capital profitability hasn't improved significantly should make further efforts.</li>
<li>To raise average ROE of companies 2ppt, OP margin must increase 25% from current levels. Achieving 25% increase in a company's overall OP margin requires significant restructuring of business portfolios.</li>
</ul>


BoJ will want to retain discretion regarding ETF sales, so it'll sell flexibly depending on stock market conditions. The sale of ETFs is just the beginning of a long journey.
The shift to inflationary economy has made it easier than before to implement measures to improve capital profitability. Nevertheless, companies whose capital profitability hasn't improved significantly should make further efforts.
To raise average ROE of companies 2ppt, OP margin must increase 25% from current levels. Achieving 25% increase in a company's overall OP margin requires significant restructuring of business portfolios.


To Raise a Company's ROE and OP Margin, Significant Restructuring of Business Portfolio Is Necessary

<ul>
<li>BoJ's policy of small-scale ETF sales appears to have made inflation curb more difficult due to the yen's depreciation, although it did not trigger a sharp stock market decline.</li>
<li>The ETFs held by BoJ reduce trading liquidity, thereby increasing stock price volatility and limiting the number of Japanese stocks available for investment by major institutional investors.</li>
<li>Given that the Bank of Japan's holdings of ETFs exceed 20% of the issued shares in some companies, the existence of “silent shareholders” is not healthy for corporate governance.</li>
</ul>


BoJ's policy of small-scale ETF sales appears to have made inflation curb more difficult due to the yen's depreciation, although it did not trigger a sharp stock market decline.
The ETFs held by BoJ reduce trading liquidity, thereby increasing stock price volatility and limiting the number of Japanese stocks available for investment by major institutional investors.
Given that the Bank of Japan's holdings of ETFs exceed 20% of the issued shares in some companies, the existence of “silent shareholders” is not healthy for corporate governance.


Despite BoJ's Post of ETF Sales, the Path to Normalization in Corporate Governance Remains Distant

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)

Is TSE List Effective? Companies Need to Demonstrate Momentum in Raising Their Capital Profitability

I would like to discuss the issues on the Nikkei ESG article published on October 6, titled “TSE Compares Companies' P/B Improvements; List of...

Metrical Inc

Nevertheless, Concern Remain that TSE Growth Market Might Include Companies that Don't Pursue Growth

I would like to discuss the Nikkei article dated September 26 titled “Growth Companies' IPOs Down 70%, TSE Reforms Accelerate Screening Process,...

Metrical Inc

Companies that Wish to Distance from Facing Shareholders Are Unlikely to Achieve Management Reform

I'd like to discuss the Nikkei article dated September 25 titled “Stock Splits Reach Highest Level in 12 Years: 121 Cases in April-September,...

Metrical Inc

To Raise a Company's ROE and OP Margin, Significant Restructuring of Business Portfolio Is Necessary

I would like to discuss the issues on the Nikkei article dated September 22 titled “Stock Prices Rise on BOJ ETF Sales; Pressure Mounts for...

Metrical Inc

Despite BoJ's Post of ETF Sales, the Path to Normalization in Corporate Governance Remains Distant

I would like to discuss the issues on the Nikkei article from August 3rd titled “BOJ ETF Sales ‘Limited Impact’: Selling in Stocks with High...

Metrical Inc