Japan Exchange’s Forecast, Annual Earnings Miss Estimates

Japan Exchange Group Inc. forecast full-year profit that was almost half of analyst estimates in its first annual earnings report after the merger of the Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co.

Japan Exchange shares, which tripled this year through April 26, closed 1.7 percent lower at 11,800 yen after dropping as much as much as 3.8 percent after the announcement. The operator of the largest equity market outside the U.S. forecast net income of 13 billion yen ($132 million) for the fiscal year ending March 31, 2014, missing the 23.4 billion yen estimate of seven analysts surveyed by Bloomberg. Net income of 10.9 billion yen in net income for the year ended March 31, was below the analysts’ projection of 11.2 billion yen.

Trading on the Japan Exchange, created through the merger of the Tokyo and Osaka bourses to cut costs amid slumping volume and increased international competition, has received a boost as government policies to defeat deflation spurred a record rally in the country’s stocks. The daily volume of shares traded on the first section of the Tokyo Stock Exchange averaged about 3.3 billion shares since November, compared with about 1.9 billion shares a year earlier, according to data compiled by Bloomberg.

“Trading values right now are extremely good, and it’s going to be hard to maintain this. It depends on macro factors, such as how the economy pans out,” said Takehito Yamanaka, an analyst at Credit Suisse Group AG which has neutral rating on Japan Exchange shares. “The exchange’s forecasts for daily trading value is lower than what the trading value actually is now, so there’s a chance that they may revise their earnings forecasts in the future.”

Trading Values

Revenue is forecast to rise 5.4 percent on the year to 87 billion yen this year, as average daily trading volume and value in equities and derivatives increase, the exchange said. Equities trading value is likely to rise 2.5 percent to 1.6 trillion yen, while the value of Nikkei 225 options traded will likely jump 36 percent to 32 billion yen.

Operating expenses will probably increase 7.3 percent to 64 billion yen this year from a year earlier, the exchange said. The bourse raised its dividend outlook to 95 yen this year, up from 80 yen the previous year.

The bourse will develop new indexes composed of “highly attractive listed companies” this year, as well as implement smaller stock price increments and start “serious” discussions for night-time equity trades, the exchange said in its medium-term management plan. It plans to reduce the increments by which shares can move up or down to encourage more trading, Chief Executive Officer Atsushi Saito said today.

Smoother Changes

“The tick sizes in Japan have become really alienated” from the global standard Saito said at a press briefing in Tokyo. “We want to make stock-price moves smoother. It should benefit the market, whether it be high-frequency traders or individual traders.”

In the U.S., stock prices can move by about 0.03 percent of its share price, in the U.K. it’s about 0.1 percent but in Japan it’s 1 percent for stocks under 100 yen, which is very “rough,” Saito said.

The bourse named two executives from the country’s largest brokerages to head the Tokyo and Osaka exchanges. Akira Kiyota, honorary chairman of Daiwa Securities Group Inc., will replace Tokyo Stock Exchange President Hiroyuki Iwakuma, according to a statement. Hiromi Yamaji, an executive at Nomura Holdings Inc., will take over from Motoharu Fujikura as president of the Osaka exchange.

The personnel changes are designed to give the bourse’s management a more international profile as it seeks to compete with regional exchanges for business.

“Japan can no longer survive independent of others, and there’s more emphasis on global competition,” Saito said. “So we used that as an evaluation criteria in our choices. Kiyota has a lot of global connections. Yamaji has a lot of knowledge and is well-known in the U.S. and U.K.”

Before it's here, it's on the Bloomberg Terminal.