TOKYO — A close look at the Tokyo stock market’s trajectory over the past two decades reveals the transformation of a bourse led by corporate juggernauts into one driven by nimble specialists, a change that mirrors the shift in the Japanese economy.
Nikko Asset Management’s Nikko Japan Open fund has traced the market changes since 1998. Accurately reading the shifting business environment has been key to its success. The fund’s unit price has climbed 75% since its founding, beating the 50% gain by the Topix index tracking the Tokyo Stock Exchange’s first section.
The fund initially stuck to the basics, buying into such time-tested manufacturers as Toyota Motor and Nippon Steel, now part of Nippon Steel & Sumitomo Metal. But it soon shifted focus to such companies as furniture seller Nitori Holdings that listed in or after 1989, the peak of Japan’s equities bubble. It was also the year Emperor Akihito assumed the throne, bringing in a new era. Unique business models have helped these new entrants, primarily service-sector companies, cut through the ensuing economic stagnation, powering a fresh round of growth that recently drove the Nikkei Stock Average to its highest close in around 21 years.
Changing with the times
Of Japan’s roughly 3,700 listed companies today, around 60% made their initial public offerings in 1989 or later. This group accounts for only 30% of Japan’s market capitalization and has not yet produced a giant on a par with Amazon.com, listed in 1997, or Google, listed in 2004. But after the ups and downs of recent decades, from the information technology bubble through the financial crisis, investors in the Tokyo market have grown wise to the value of strong management.
“What the winners have in common is a trend toward specialization,” according to Nikko’s Toshinori Kobayashi. Uniqlo operator Fast Retailing, listed in 1994, took control of the entire apparel-making process, from design and production to retail sale. This novel business model at one point pushed the company’s market capitalization above that of convenience store operator Seven & i Holdings. Nidec, listed in 1988, has usurped electronics makers Panasonic and Kyocera by dedicating itself to the motor business.
A willingness to switch tracks as needed is another predictor of success. Take Sony. In fiscal 2000, nearly all its group operating profit came from household appliances. In fiscal 2016, financial services were the largest earner, followed by video games. These businesses could propel Sony to a record operating profit this fiscal year.
And so-called parent-child listings, where both parent company and subsidiary are publicly traded, have fallen out of favor amid criticism that parental interference can hurt the listed unit’s independence. The Hitachi group took this critique to heart when reorganizing to stem massive losses in the wake of the financial crisis. Others have done likewise, reducing parent-child listings from 417 in fiscal 2006 to 270.
Turnover on Japan’s bourses has been high in general since 1989. While 100 or so companies have listed each year on average, around 1,650 have delisted up to now. Some, such as Yamaichi Securities, closed their doors voluntarily. Others, including department store operator Sogo, were forced to delist by overwhelming debt after the bursting of the economic bubble.
Corporate overhauls and industrywide realignments have since rid Japanese companies of excess facilities, debt and staff. Corporate Japan’s overall net profit margin now tops 4% after years of hovering around 1%. The Nikkei average looks to continue climbing after reaching its latest milestone, as “the fruits of reform have yet to emerge in full,” according to Hiroyuki Matsunaga of UBS Asset Management.
About 30% of listed companies have rewarded investors by delivering cumulative profit over the past three decades exceeding the cost of capital — effectively, how much profit shareholders expect. Companies with high return on equity tend to have larger excess profit. Nippon Telegraph and Telephone has generated 4.9 trillion yen ($43.6 billion) in such excess profit since going public in February 1987. While the telecommunications giant’s stock price has never returned to its high from that year, its shares have risen in value if dividends are included in the tally.
Keyence and Fanuc leveraged their industrial robotics and sensors businesses to deliver excess profit of 680 billion yen and 360 billion yen, respectively. A number of pharmaceutical companies make the cut, thanks to numerous acquisitions in the sector. Such trading houses as Mitsui & Co. and Mitsubishi Corp. sit near the top of the excess-profit list, owing to investments in such areas as resources.
Major automakers and electronics conglomerates are largely absent from the highest-performing pack. Fierce global competition and periods of yen appreciation have kept the giants from using shareholders’ money as effectively as they might have at many times over the past few decades.
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