TOKYO: Aiming to establish itself as a major exchange in Asia, the Tokyo Stock Exchange plans to create a new stock price index that focuses on return on equity (ROE).
With the new index, the TSE wants to make Japanese stocks more attractive to domestic and foreign investors as international competition among stock exchanges continues to intensify.
The aim is in line with Prime Minister Shinzo Abe’s economic growth strategy. But it is uncertain whether Japanese companies will be able to raise ROE figures to levels that would attract domestic and foreign investors.
TOPIX, TSE’s current stock price index, indicates moves in aggregated market prices for about 1,700 companies. But TOPIX is easily affected by stock price fluctuations for companies with large aggregated market prices, such as manufacturers and banks.
Some economists have pointed out flaws with TOPIX, with one senior TSE official saying, “It doesn’t indicate the real condition of Japanese companies.”
By including firms with high ROE figures in the new index, the TSE expects that efficiently managed companies with high growth potential will draw attention from investors, even if the companies’ size is small in terms of sales and other factors.
The TSE is ranked third in the world in terms of trading volume of physical shares, behind the New YorkStock Exchange and Nasdaq. However, it has been difficult for the TSE to revitalize the physical share market as its growth potential is seen to be lower than that of futures and other derivatives.
In its campaign pledges for last year’s House of Representatives election, the Liberal Democratic Party vowed to create a new “TSE global 30 companies” index that would become Asia’s No. 1 financial and equities market.
A TSE official said, “At a time when more attention is being paid to foreign investors, the plan to create a new index is in line with the aims of the administration.”
However, there are many hurdles before companies can increase their own ROE figures, which are popular among foreign institutional investors as a major investment indicator.
Japanese companies’ ROE figures have not risen because many relied on cost-cutting measures to secure immediate profits due to a prolonged period of deflation.
Major Japanese companies’ROE is about 6 percent on average, much lower than the more than 15 percent enjoyed by major European and US firms.
Some market players have been critical of the situation.
Kengo Nishiyama, a senior strategist at Nomura Securities Co., said: “Some shareholders will feel that Japanese companies have not efficiently utilized investments to make enough profit. Domestic firms should raise their ROE to at least double-digit figures.”
For now, there are high expectations of improved corporate earnings thanks to government policies. However, corporate sentiment on mergers and acquisitions for investment and growth is still middling. By making the new index popular, the TSE is also aiming to encourage such corporate activities.
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