Japan Exchange and Nikkei to Start Index Focusing on ROE

Japan Exchange Group Inc. (8697), operator of the world’s second-biggest equity market, will create an index with Nikkei Inc. that selects members based on return on equity, in a bid to highlight the nation’s best stocks.

The bourse operator and Nikkei, which also runs the Nikkei 225 Stock Average, will compile the measure from Jan. 6, according to a statement on Japan Exchange’s website. The gauge will have 400 shares, with 386 Tokyo Stock Exchange first section companies, one from the second section, two from the TSE Mothers market and 11 from Jasdaq. Stocks will include Japan Tobacco Inc. (2914) and Toyota Motor Corp. (7203) as well as Rakuten Inc. (4755) and GungHo Online Entertainment Inc., the bourse said.

Eligibility for the JPX-Nikkei Index 400 is based on quantitative criteria such as return on equity, operating profit and market value, as well as qualitative aspects such as having at least two independent outside directors and providing earnings disclosure in English, the statement said.

“The new index will be composed of companies with high appeal for investors,” according to the statement. “The new index will promote the appeal of Japanese corporations domestically and abroad, while encouraging continued improvement of corporate value.”

Japan’s Government Pension Investment Fund, the world’s biggest manager of retirement savings with 121 trillion yen ($1.24 trillion), will invest in the new index as part of plans to boost allocations to growth stocks, the Nikkei newspaper reported on Oct. 5, without citing anyone.

GPIF Investment

“As the new gauge may become the benchmark for GPIF, it will certainly be a driving factor in the market tomorrow,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc., Japan’s second-largest brokerage. “But we don’t know how much the fund will invest or when it will actually move.”

The new index has outperformed the broader Topix index in four of the past seven years, according to data compiled by the bourse and Nikkei Inc. The measure rose 42 percent this year through August, compared to a 44 percent gain for the Topix, the statement showed.

“The market will surely react to this new measure and shares included in it will be bought,” Daiwa’s Shiomura said. “The impact will be big especially for emerging shares outside the Topix that made the cut.”

To contact the reporters on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net

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