Japan groups take a shine to JPX-Nikkei 400 index

It is never nice, being on the wrong side of the velvet rope.

So when Amada, a Japanese toolmaker, was left out of the first annual cut of the JPX-Nikkei 400, a new index launched last summer to showcase the country's most profitable, shareholder-friendly companies, president Mitsuo Okamoto was stung into action.

Announcing the group's full-year results last month, Mr Okamoto said that for the next two years, Amada would pay out half of its net profits in dividends, and use the other half to buy back stock.

Not only that: it would look to hire two independent directors by the middle of next year, going beyond the Tokyo exchange's basic requirement for listed firms to "strive to" hire at least one outsider, or explain why they cannot. Entry into the club is a long shot. According to calculations by Mizuho Securities, Amada - a member of the Nikkei 225 since 2011, with a market capitalisation of Y404bn ($4bn) - ranks 771st among the pool of eligible constituents for the 400-strong JPX-Nikkei, based on the basic 40 per cent weighting for historical average return on equity, 40 per cent for three-year cumulative operating profit and 20 per cent for market cap. (On top of this, there is a qualitative assessment of a company's governance structures.)

But membership is worth the effort, says Mr Okamoto, who saw shares in the 68-year old company leap 24 per cent during the two days after the announcement of the new capital strategy.

He notes that 45 per cent of Amada's shares were held by foreign investors at the end of March - much higher than the 26 per cent average among the Nikkei 225 - and 68 per cent by institutions.

Being part of the JPX-Nikkei is "significant when trying to attract global funds," he says. "[Institutional] investors want us to improve capital efficiency, and we need to respond to that."

That kind of response is exactly what the designers intended.

The JPX-Nikkei, developed jointly by the Japan Exchange Group and Nikkei Inc, the publishing company, is among the main features of a broad programme to breathe new life into the world's second biggest equity market.

The way the government led by Shinzo Abe sees it, companies themselves are partly to blame for the sluggish activity of the past couple of decades, having squirrelled away cash while producing too-low returns on equity. Investors are to blame, too, for letting them.

Measures include a stewardship code for institutional investors, intended to facilitate more dialogue with managers, and a new, more aggressive approach to portfolio management from bond-heavy public pension funds such as the Y129tn ($1.3tn) Government Pension Investment Fund. The government also plans to draw up Japan's first code of conduct for companies, to bind them to better standards of governance and disclosure.

Governance aficionados have applauded the across-the-board effort.

"The regulator, the trade ministry and the [Tokyo] exchange seem to be on the same page, all working together," says David Smith, head of corporate governance at Aberdeen Asset Management in Singapore.

Six months on from the official launch of the JPX-Nikkei index, usage is growing. Four exchange traded funds are now tracking the new index - as many as the Topix - while investment-trust managers have launched at least a dozen passive products.

Last month the GPIF said it would start switching from the Topix to the JPX-Nikkei for some of its domestic passive equity mandates - a "helpful move," according to Koji Watanabe, head of planning at JPX.

In February, Nissay Asset Management, a subsidiary of Nippon Life, launched what it claimed was the first active fund aiming to beat the JPX-Nikkei.

The index sample should really have been smaller, at 100, to shine a stronger light on "fundamentally good companies", says George Iguchi, deputy general manager of the equity investment department at Nissay, which manages about Y7tn. "But it is a first good step."

Meanwhile, some JPX-Nikkei members are looking to cement their standing within the elite by continuing to push ROEs higher. Unicharm, a Y1.3tn manufacturer of nappies and hygiene products, which boasts it was among the first three-dozen companies selected for the new index, has what it calls a "three fifteens" strategy - targeting sales growth of 15 per cent, an operating margin of 15 per cent, and a 15 per cent ROE, all by 2020.

"We will build a foundation to have an ROE of 15 per cent constantly, then the next target will be 20 per cent - the same as our global competitors," says Kazuya Kondo, an executive in the accounting control and finance division.

For many companies, operating on a thinner equity base is not a decision taken lightly. Amada's sales halved in the two years after the Lehman crisis, for example, as many of its small customers collapsed or trimmed orders.

But improving capital discipline is the right thing to do, says Mr Okamoto. "We need to maximise our corporate value," he says.

© The Financial Times Limited 2014. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation