Japan seeks higher return at firms with shame gauge
Central bank may buy exchange-traded funds tracking an equity gauge designed to make companies use cash better as part of its growth push
Buried amid the surprise stimulus by the Bank of Japan last week was a footnote: the central bank will start using an equity gauge designed to shame the country's companies into becoming more profitable.
The Bank of Japan could buy exchange-traded funds tracking the JPX-Nikkei Index 400, it said on October 31, when it tripled annual purchases of ETFs to three trillion yen (HK$203.6 billion).
The country's US$1.1 trillion Government Pension Investment Fund is already investing in the state-backed equity measure designed to make Japanese companies use cash better.
For Mitsubishi UFJ Asset Management and SMBC Nikko Securities, the central bank's move shows Japan will put its money where its mouth is in seeking to improve return on equity at firms. Other efforts include a government-endorsed return on equity target of 8 per cent and a stewardship code that enlists investors to press management for higher returns.
"The government is continuing to put pressure on companies and investors," said Takashi Miyazaki, general manager of strategic research and investment at Mitsubishi UFJ Asset. "[Return on equity] on the Nikkei-225 Index currently averages about 10 per cent. If that rose to 12 per cent, the Nikkei-225 would probably climb to 20,000."
Return on equity stood at 8.3 per cent on the Nikkei-225 at the end of last quarter and 9.4 per cent on the JPX-Nikkei 400, data showed. That compares with 15.3 per cent for the S&P 500 Index in the United States.
Return on equity at Japanese companies was half the global average for much of the past decade and among the lowest of 24 developed markets tracked by Bloomberg. The Topix Index's average for the 10 years to 2013 was 6 per cent, beating only Greece's ASE Index.