Japan Shame Index Dumps Sony Stock, Adds Panasonic

Sony Corp., the consumer-electronics maker that posted losses in five of the past six years, was rejected in the first reshuffle of Japan’s profit-oriented stock index while Panasonic Corp. made the cut.

The government-backed JPX-Nikkei Index 400 added 30 other companies, including Mazda Motor Corp., Daiwa Securities Group Inc., Seiko Epson Corp. and Aiful Corp., the gauge’s compilers said in a statement today. Capcom Co. and Skymark Airlines Inc. are among those being tossed out when the changes take effect on Aug. 29. Inclusion in the measure matters because investors including Japan’s 126.6 trillion yen ($1.2 trillion) pension fund use it as a benchmark.

The rejection of Sony, creator of the PlayStation, was expected by UBS AG, Goldman Sachs Group Inc. and at least four other brokerages. Losses at the company have created negative return on equity that dwindling operating income and market value no longer counter. Panasonic’s inclusion comes as the company returns to profit and pivots into businesses including making batteries for electric cars.

“Panasonic is back after being left out last year, and you can see they’ve put the effort in with the gauge in mind,” said Yasuyuki Suda, Tokyo-based general manager at Mito Securities Co. “It’s not surprising Sony’s been rejected given its earnings. It must be humiliating for the management.”

The index, which began in January, picks companies with the best operating income, ROE and market value to showcase the nation’s most shareholder-friendly firms and shame executives of those it excludes into altering their strategies in a bid to get back on. The JPX-Nikkei 400 climbed 0.5 percent today, paring this year’s loss to 2.7 percent. The broader Topix index has slid 3.4 percent in 2014.

Index Selection

The JPX-Nikkei 400 is compiled by Japan Exchange Group Inc. and Nikkei Inc. Constituents are chosen based on three-year average ROE, which measures how efficiently capital is used, and cumulative operating profit, each accounting for 40 percent of the selection criteria, while market value makes up the remaining 20 percent. About 10 firms can also be replaced based on corporate-governance standards, such as providing English-language results and appointing at least two independent outside directors.

Panasonic posted its first annual profit in three years for the period ended March after two straight losses of more than 700 billion yen. Sony has recorded losses in five of the past six years and is predicting another one to come. It had a higher three-year operating income when the gauge’s companies were first chosen, helping it get into the measure despite negative ROE.

No Comment

Yumi Takahashi, a spokeswoman for Sony in Tokyo, and Panasonic spokeswoman Megumi Kitagawa declined to comment on the index announcement.

“Panasonic is on its way to recovery while Sony is not,” said Keiichi Ito, a quantitative strategist at SMBC Nikko Securities Inc. “While Panasonic’s average ROE for the past three years is negative, it was chosen because its latest earnings were positive and the company has other qualitative points that worked in its favor.”

Of the 31 companies being added to the index, all trade on the first section of the Tokyo stock exchange except for Jasdaq-listed Starbucks Coffee Japan Ltd., according to today’s statement.

Otsuka Holdings Co., Japan’s third-largest drugmaker by market value and the company behind Pocari Sweat sports drinks, will join the measure after not being chosen originally as it hadn’t cleared the requirement to be listed for at least three years.

Profit Focus

The JPX-Nikkei 400, the brainchild of Japan Exchange and planners loyal to Prime Minister Shinzo Abe, seeks to push Japanese companies to change business strategies that have kept returns at half the global average. As the nation exits deflation, Abe wants companies to focus more on making profit and investing it for growth or distributing it to shareholders.

Return on equity for members of the broader Topix index, which tracks 1,813 stocks, was 8.3 percent for the past 12 months, according to data compiled by Bloomberg. The figure for the JPX-Nikkei 400 was 9 percent, the data show.

Japan’s Government Pension Investment Fund, which is being urged to buy more stocks, said in July it had about $1.5 billion of its more than $205 billion in local stocks tracking the measure by the end of March. The Bank of Japan is considering buying exchange-traded funds based on the JPX-Nikkei 400, people familiar with the central bank’s discussions told Bloomberg News last month.

GPIF plans to increase its target for domestic stocks to more than 20 percent of its portfolio from the current goal of 12 percent, Reuters reported today, citing government and ruling-party officials that it didn’t identify.

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