Tokyo Stock Exchange asks Japanese companies to take action to support share prices

After nearly 33 years, the Nikkei 225 is seeking to shatter the record of 38915 set on December 29, 1989. Global investors are becoming excited about the surge in foreign investment in Japanese stocks that has occurred since April, reversing the lackluster interest of recent years.

Investment in Japanese equities began to slide in late 2015 as the initial euphoria over monetary policy, fiscal policy, and corporate reforms faded. Global investor interest has picked up in recent weeks, with none other than the ace investor, Warren Buffett’s Berkshire Hathaway Inc. raising its stake in five of Japan’s trading houses.

So, what could be reviving interest from international investors in Japanese markets? Japan’s corporations are taking a more shareholder-friendly stance, and the country’s loose monetary policy is taking longer to unwind.

What is more interesting is that on March 31, the Tokyo Stock Exchange issued a note to the companies listed on the exchange titled, “Action to Implement Management that is Conscious of Cost of Capital and Stock Price”

BlackRock’s weekly commentary provides more insights into what Tokyo Stock Exchange intends the companies to do.

The Tokyo Stock Exchange has asked companies that are trading under their book value to publish plans “as soon as possible” on lifting their stock prices. The exchange specifically called for better balance sheet management as many companies hoarded cash over the past decade.

It makes sense for companies to deploy this cash by investing in growth opportunities or buying back shares now that the growth outlook has improved and inflation has returned.

This could potentially be a pivotal moment for Japan. Roughly half of its companies trade below book value and roughly half have cash on their balance sheets after subtracting liabilities, Refinitiv datashows.

Signs companies are complying may appear in the coming weeks during Japan’s annual shareholder meeting season. Plus, Japanese investors could be the next key buyer’s thanks to tax incentives starting in January 2024 that encourage savers to shift their money from cash into investments.

On the macro front, the BOJ’s efforts to raise inflation –after a long battle with deflation –are a stark difference from other DM central banks that are still hiking rates to deal with stubborn inflation.