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4 min read . Updated: 16 Feb 2022, 06:16 PM IST The Tokyo Stock Exchange, a former global No. 1 turned also-ran, has a plan for revival that calls for sweeping out the market’s dusty corners where small and lightly traded companies loiter.
The exchange recently unveiled its biggest overhaul in 60 years that includes tougher standards for its top section, which will be renamed “Prime" and start operating in April.
Some foreign investors, though, say the exchange’s real problem isn’t a few cobwebs in the corner but the entire edifice of corporate management in Japan, where many big companies are sitting on cash and stagnating. These investors say many companies see a listing on the exchange’s top section as an honorary distinction rather than as a spur to engage with shareholders.
“Japan is not an easy country to invest in for the global community. There’s a peculiar corporate culture as well," said Masakazu Takeda, a portfolio manager with the Hennessy Japan Fund based in Hong Kong.
The Tokyo Stock Exchange’s president, Hiromi Yamaji, says lifting standards is best done slowly and steadily. His supporters point to signs of change in recent years: More foreigners and women are serving on Japanese boards, deal-making is on the rise and activist investors have helped lift value at some of the market’s stalwarts.
The overhaul “is just a starting point and I think it’s a good starting point," said Mr. Yamaji in an interview.
He also drew an implicit contrast with China’s larger but more volatile market. “Among Asian markets, we are the only market with a big and deep economy and it’s a democracy," he said.
The Tokyo market, which in the late 1980s accounted for some 40% of the world’s stock-market value, is now in its entirety worth less than Apple Inc., Microsoft Corp. and Alphabet Inc. together. In market value, Tokyo’s total of about $6.2 trillion comes in fifth globally after the New York Stock Exchange, Nasdaq Stock Market and markets in Europe and China.
Another indication of the low estimation in which investors hold Tokyo stocks: Roughly half of them trade at less than their book value, which is equal to assets minus liabilities. That measure, while not commonly used outside Japan, is often cited by investors as an indication that the market expects management to destroy more value than it creates.
According to the theory behind the overhaul, the presence of some unqualified companies on the first section casts a broader pall over the market and makes Tokyo look like a backwater.
To qualify as Prime, a company needs to have at least one-third independent directors, and at least 35% of its shares need to be free-floating or available for trading by the public. Companies are supposed to agree to more dialogue with investors and make disclosures in English.
“If you choose Prime, you know you have to start working on governance with overseas investors in mind," said the exchange’s Mr. Yamaji.
The overhaul contains a big loophole. Companies that don’t clear the thresholds can still claim the Prime distinction simply by declaring themselves Prime-worthy and presenting a plan to meet the standards someday.
There’s no fixed deadline. Mr. Yamaji said the exchange wanted to see how companies were adapting, and most said they would be ready in five years or less.
The Prime market is set to include 1,841 companies, only slightly fewer than the 2,182 currently on the first section. Most non-Prime companies will go into a new “Standard" category, while a “Growth" section will house startups and smaller companies.
“Most international managers are focused on high-quality, globalized Japanese businesses. In practice these companies should see little impact from the new rules," said David Mitchinson, who runs the Zennor Japan Fund in London. “The bad news is that almost all companies are on Prime, so it does not serve as a meaningful marker of quality."
While much of the criticism has focused on Prime’s loose entrance procedures, some foreign fund managers say the theory behind the overhaul is itself flawed. They say big companies that dutifully meet all the exchange rules—what Mr. Mitchinson called “box-ticking-following governance"—aren’t necessarily good prospects.
At Tokyo-based Rheos Capital Works, which has a fund focusing on smaller companies, Deputy President Mitsuhiro Yuasa said the Tokyo Stock Exchange left investors with the impression that more established companies are better. He said that contradicted the goal of revitalizing the market with aggressive younger companies.
“The changes tell us that large companies are good. High liquidity is good and low liquidity is bad," said Mr. Yuasa.
He said that in addition to setting entry rules for listing, the Tokyo Stock Exchange should also set clearer rules for ushering listed companies toward the exit when it is clear they are “zombies" with no interest in building a business.
This story has been published from a wire agency feed without modifications to the text
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