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JPX raises appeal of Japanese stocks

Interview - February 11, 2016

Japan Exchange Group (JPX) plays a crucial role in the on-going development and provision of a reliable, efficient, transparent and profitable market on the Japanese stock exchanges. Group CEO Akira Kiyota explains how JPX provides support for companies seeking to list, while working to raise IPO quality and ensure confidence among shareholders and investors. He also discusses the effects of new codes of conduct in force, challenges such as cyber attacks facing the industry, and the motivation for companies to increase their levels of performance and governance. 



What key role do you think JPX plays towards generating trust with investors?

You cannot say that there is only one thing that generates trust with investors. Japan Exchange Group (JPX) was established in January 2013 through the business combination of the Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE). The reorganization of the underlying market functions have delivered a variety of benefits, including improved accessibility and reduced costs. After the business combination, subsequent steps were taken to integrate the cash equity market, self-regulatory and clearing operations in July 2013, and then integrate the derivatives markets in March 2014. We see increased accessibility and convenience brought by the business combination and market integration as important steps toward ensuring the future development of the Japanese market.

TSE is the third largest stock exchange after the New York Stock Exchange and Nasdaq. TSE is known for high market liquidity, where those who invest and participate in the exchange can trade anytime easily. In addition, TSE offers fair and transparent price information which determines the value of the market. Also, under the JPX corporate umbrella, Japan Exchange Regulation (JPX-R) acts as a self-regulatory body for TSE and OSE, dedicated to maintaining financial market transparency and fairness so as to ensure investors are able to trade financial instruments with confidence. Since foreign entities and individuals own 32% of the Japanese stocks, and they account for 60% of the total trading value in the TSE market, TSE has trust and reliability in international markets.


Do you think that the majority of Japanese companies have regained their full market strength now, four years after the introduction of Abenomics?

Aggressive initiatives of Abenomics have enhanced corporate value in Japan. It has been required that listed companies improve their corporate governance to enhance corporate value and their capital efficiencies.

In February 2014, Japan’s Stewardship Code was launched. The code required institutional investors to enhance the medium-to-long-term investment return for their clients by improving the corporate value and promoting sustainable growth through constructive engagement or purposeful dialogue based on an understanding of the companies and business environment.

In June 2015, TSE introduced Japan’s Corporate Governance Code, which is a principle-based code for listed companies to follow. For example, the Corporate Governance Code requires companies to appoint at least two independent directors within the company. The proper implementation of the principles is expected to contribute to the development and success of companies, investors, and the economy as a whole, by virtue of individual companies’ self-motivated actions aimed at achieving sustainable growth and increasing corporate value over the medium-to-long term.

The Corporate Governance Code is for listed companies’ internal staff and monitoring, whereas the Stewardship Code requires external institutional investors. I believe that through the introduction of these two codes, the mindset for company management going forward will change.

Return of Equity (ROE) of the listed companies in Japan grew from 5.7% in 2012 before Abenomics to 8.5% in 2014 – a relatively short period of time. The improvement of ROE in this period is not only a result from the launch of the codes. However, I believe that we can see more improvement of ROE from the effects of the codes in the near future.


Regarding your new index, the JPX-Nikkei Index 400, that was recently introduced, can you explain what the implications are for foreign investors and the market as a whole?

The introduction and creation of the JPX Nikkei Index 400 was perfectly timed with the introduction of the Governance Code and the Stewardship Code. To raise the corporate value of the listed companies, TSE focused on further enhancing corporate governance and the importance of ROE from the standpoint of capital and management efficiency. We introduced the JPX-Nikkei Index 400 among other measures aimed at encouraging a shift in management toward raising corporate value.

The JPX-Nikkei Index 400 is composed of companies with high appeal for investors, which meet requirements of global investment standards, such as efficient use of capital and investor-focused management perspectives. This index will promote the appeal of Japanese corporations domestically and abroad, while encouraging continued improvement of corporate value, thereby aiming to revitalize the Japanese stock market.

The index is designed to include companies that prioritize capital efficiency, profitability, and investor viewpoints.

We select 400 companies for the JPX-Nikkei Index 400 constituents from the 3,500 listed companies, according to the publicly announced criteria.

The JPX-Nikkei Index 400 adopts ROE as a selection criterion. The impact of this index is so immense that we have seen numerous companies review their distribution policies to shareholders and pay out greater dividends in a bid to secure inclusion in the index. We are also seeing the creation of many investment trusts and exchange traded funds (ETFs) tracking the index. As this trend becomes increasingly prominent, we believe that corporate awareness toward effective capital use based on the shareholder perspective will become more pronounced. This will lead to an increase in corporate value and fuel the push toward creating a new Japanese stock market.


What is your view on the overall potential of the support that you bring to companies in the JPX?

Securities markets have a crucial role to play in stimulating Japan’s economy and industries by providing a steady supply of capital for growth companies through IPOs. The relentless efforts of those involved in the market have seen IPO activity in Japan exit its post-financial crisis slump and embark on a path to recovery, with the number of IPOs conducted rising from 19 in 2009 to 98 in 2015. JPX will continue to provide support for companies seeking to list while working to raise IPO quality and ensure confidence among shareholders and investors.


How are you using that opportunity to look at the major issues and opportunities facing the industry?

I am a board member of the World Federation of Exchanges (WFE), which is new for me this year, but I would like to participate in general assemblies going forward. Before being elected as a board member, I had attended a general assembly where a large concern was raised regarding cyber security, and the risk management and stability of the clearing industries. The market is globalized and the large amount of trading is occurring. From the perspective of those who operate the markets, proper clearing, accounting and safety are large concerns. Commodity Futures Trading Commission Chairman, Mr Massad, has expressed the strong interest in clearing. Japan Securities Clearing Corporation (JSCC), part of the JPX corporate group, focuses on stability of management.

We have to be attentive about possible cyber-attacks on the exchange, which could be devastating for the exchange and for the market itself, bringing large damages.


How are you utilizing your extensive experience across markets to heighten the visibility of the brand of the exchange group?

JPX continues to pursue measures to raise the appeal of Japanese stocks. Through observing and practicing the principles in the Corporate Governance Code, corporations can be expected to take initiatives toward sustainable growth and increasing corporate value in the medium-to-long term. In regards to the JPX-Nikkei Index 400, we would like to make the Japanese market more appealing to investors. I believe Japanese companies try to improve performance to become part of the index.

The securities industry has benefitted a lot from Abenomics, but what JPX has to do in the future is to generate earnings power. JPX’s earnings structure, including its core earnings from trading services, may be easily affected by economic conditions and market trends, which are out of its control. Therefore, JPX needs to ensure stable earnings through appropriate cost controls and strengthen its earnings power through diversifying its revenue sources. To expand our business fields, JSCC seeks to sharpen its competitive edge while also expanding its fields of business.

Also, we would like to enter into the commodity market in the future, in order to diversify our revenue sources. I also would like JPX to build a global business portfolio that is well balanced and competitive with the overseas exchanges. In order to achieve this, we are currently creating cooperative alliances with partners in Asia and S&P Dow Jones for the index. In Taiwan, JPX and the Taiwan Stock Exchange link our markets with cross-listing of index products. We initiate the product cooperation with the Taiwan Futures Exchange as well. In Myanmar, we have supported the launch of the Yangon Stock Exchange.