Boosting Corporate Valuations: Japan Stock Exchange Implements Name and Shame Strategy

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Japan’s stock exchange is set to implement an innovative naming and shaming strategy with the aim of promoting better governance and higher valuations.

In March, the Japan Exchange Group, which oversees the Tokyo and Osaka exchanges, informed companies of its desire to witness advancements in corporate value, a key driver in recovery following the market crash over 30 years ago.

Building on this, JPX CEO Hiromi Yamaji intends to publicly disclose the names of listed companies that have met the group’s requests, enhancing transparency for investors and creating peer pressure for companies to progress.

Yamaji explained in an interview with the Financial Times, “We will renew the list every month, but the first list will be published in January…that’s the plan. In Japan… peer pressure or nudge is a very important method to push people to go forward.”

Japanese stocks have recently experienced a significant upswing, bringing an end to years of disappointment for investors at home and abroad. The Topix and Nikkei 225 indices have both risen over 20% this year.

This growth can be attributed to several factors, including a weaker yen and the return of long dormant inflation, providing companies with the ability to increase prices. Additionally, Japan has gained attention from global investors seeking to boost Asian exposure without taking on the risks associated with China’s geopolitical and regulatory landscape.

The government and market authorities have also played a role in the recent success by implementing measures to strengthen board structures, attract institutional and retail investors, and encourage companies to adopt more dynamic strategies.

These efforts culminated in a series of meetings between Prime Minister Fumio Kishida and the world’s largest fund managers earlier this month.

Investors have noted that although progress has been made, there is still a need for the stock exchange to more actively encourage companies to improve their governance standards, shareholder engagement, and cost of capital.

Earlier this year, Yamaji highlighted that approximately half of the companies listed in the prime index have a price-to-book ratio of less than one, indicating that the market values them below their net asset worth. Now, the exchange plans to track companies that have disclosed their intent to comply with the guidelines, effectively shaming those who do not.

Yamaji stated, “We are publishing the list of the companies’ actual names who did disclose [but] obviously we have only 3,300 companies listed on the prime and standard [markets]…you can subtract…it’s not a difficult calculus.”

Additionally, the exchange will solicit and publish investor opinions on the measures companies have taken, such as increasing dividends, conducting share buybacks, selling non-core assets, and improving communications with the market.

Bruce Kirk, chief Japan equity strategist at Goldman Sachs, believes that a regularly updated list of compliant companies will significantly increase the spotlight on Japanese corporate governance reform, putting pressure on management teams yet to respond.

David Mitchinson at Zennor Asset Management stated, “This name-and-shame strategy will increase pressure on most companies. As yet only 31% of firms have formally responded, so the pressure from shareholders for those who have not will be intense.”

Yamaji noted that larger companies with low price-to-book ratios have made faster progress compared to their smaller counterparts. For companies with a market capitalisation of over Y100bn, the proportion of those that have responded increases to 45%.

However, he warns, “We will continue to reiterate that our request is not only for those companies who are being traded below…book. No, everybody is a target.”