Shame Factor to Spur Buyback Rush by Japan Companies, Daiwa Says

Japanese companies will rush to buy back shares in the next six weeks as they seek to boost return on equity before the fiscal year ends, according to Daiwa Securities Group Inc.

The country’s second-biggest brokerage expects 16 firms, including airline ANA Holdings Inc. and developer Mitsubishi Estate Co., to repurchase shares by the end of March, Senior Strategist Kenji Shiomura wrote in a report dated today. Avoiding public shaming by proxy adviser Institutional Shareholder Services Inc. and exclusion from the JPX-Nikkei Index 400 will motivate them, Shiomura said.

ROE is rising at Japanese companies after languishing at half the global average for much of the past decade. Prime Minister Shinzo Abe’s government has been targeting better corporate governance, backing the creation of the JPX-Nikkei 400 to get executives to use cash well. Shiomura says the trend is set to continue.

“Many companies that announced big buybacks this year have strong cash flow and ROE of just under 5 percent,” Shiomura said in a phone interview from Tokyo today. “They are extremely conscious of meeting the ISS threshold. For those just under 5 percent, that becomes much more feasible.”

ISS, which advises foreign institutional investors such as passive funds on exercising voting rights, said in November it would tighten its standards for ROE at Japanese companies. The firm will recommend voting against director appointments for businesses whose average ROE for the past five years is less than 5 percent, effective from this month.

ANA, Japan’s biggest airline, has five-year average ROE of 4.7 percent, according to estimates by Daiwa. For Mitsubishi Estate, the figure is also 4.7 percent.

ROE for companies on the Topix index stood at 8.3 percent at the end of December, up from 5.7 percent two years earlier at the start of Abe’s second term.

“It’s not only overseas investors using ISS that are setting ROE standards,” said Shiomura. “Domestic institutions are also doing so.”

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