With Slow Japanese Stock Market Recovery TSE to Revise Listing Regulation

Sunday, December 13, 2009 – Osaka, Japan

Today, Japan’s leading newspaper specialized in economy/business and politics, reported that Japan stock market is still in the plunge when stock prices are at high level worldwide. Japan is the only country whose stock price fluctuation ratio is minus since end of this August (timing of General Election) among 20 major countries and regions. This is said to attribute to high yen, increase in capital investment and investors avoiding to invest in Japan stock from suspiciousness on management of the economy by Hatoyama administration. The Nikkei Stock Average has recovered to over 10,000 yen after having once plunged to far below 9,000 yen at the lowest, but compared to other stock market, it is prominent that Japan stock price has not been recovering sufficiently.

1. Stock prices of countries and regions excluding Japan and Italy have been on the rise since September in line with worldwide economic recovery.

Since the General Election in end of August, The Nikkei Stock Average dropped by 3.7% as of December 11. It has once declined by 13.4% in the end of November due to drastic high yen. On the other hand, stock prices of other major countries have been firmly improving since September with bottom-out of worldwide economy. Italy’s stock price has remained almost constant since September but all others have been rising; +27% for Russia, over +20% for China and Brazil, and the U.S has been steadily improving with approximately +10%.

2. There are several reasons for plunge in Japan stock price.

The first reason is drastic high yen. Since Japan relies much on export-oriented industries, this has huge negative impact on the Japanese economy.

The second reason is many companies have been issuing many new stocks to increase capital and enormous amount of share of stock were supplied to the stock market, leading to dilution of outstanding stocks.

The third reason is uncertainty of government’s economic policy, leading to negative impact on market psychology. Immediate execution of countermeasures for deflation and high yen is critical but Hatoyama administration has other issues such as political donation and transfer of Futenma airbase, and some experts in economy are worried that the priority of economy under Hatoyama administration might be not so high. In addition, finalizing 2010 budget is taking time because the administration is having a tough time in reducing request of budget allocation. With this, on December 11, in bond market, long-term interest rate rose because of the laxing fiscal discipline, and in the stock market, many experts view that the Hatoyama administration has not yet developed long-term growth strategy.

3. Current situation needs to be improved immediately.

Under the severe current situation, Japan needs economic measure to be implemented immediately. Expectation of mid/long-term economic growth of Japan is shrinking among overseas investors. And with ongoing deflation as mentioned in the previous article "How Japan Get Out From 10 Year Deflation?", Japan’s GDP is at one of the lowest level in 19 years.

Under ongoing deflation situation, it would be difficult for companies to increase revenue and profit, and stock price tends to decrease as well. An expert in stock market comments that overseas investors are likely to avoid investing to countries that are going through deflation. And according to a survey executed by the U.S. Merrill Lynch in November, the percentage of investors who are timid to Japanese stocks was the highest since autumn of 2002.

Trading value for 2009 at the TSE (Tokyo Stock Exchange) is assumed to be at the lowest level in 5 years. Also, it is assumed that trading value of Shanghai Stock Exchange of China will be greater than that of TSE. Number of companies that newly listed this year in Japan is 19, which is the least in 31 years.

One of the few positive atmospherics is the fact that Japanese stocks on hand of investors seems to be less than usual. So when investors change their view and judgment on the administration’s management of the economy and/or exchange rate changes, big investors may increase again their Japanese stocks on hand, which would lead to improvement in Japan stock market.

However, in general, many experts view that for the time being, stock market prices will not improve so much because of the anxiety that the economy will plunge again with deflation.
With deteriorating cash flow of Japanese companies as reported in recent articles by Nikkei, it is natural that Japanese companies would need to raise capital and plunge in stock price would be a big negative factor for them. According to a Nikkei’s article of December 12, debt that Japanese companies have on UAE (general construction, trading etc.) of 66 billion yen (approximately 7.5 billion USD out of 15 billion USD) in total are still uncollected, as of December 11. Also, according to another Nikkei’s article of December 10, there is an anxiety that financial situation (especially consolidated cash flow and interest-bearing debt) of Japanese general construction companies, is deteriorating, attributing to factors such as big burden of reimbursed expenses of big overseas projects of UAE and Algeria.

4. TSE is to revise listing regulation to create an environment in which companies will be able to increase capital flexibly, with minimum negative impact on their shareholders.

According to another today’s article of Nikkei, TSE is to revise listing regulation to create an environment in which companies will be able to increase capital flexibly, with minimum negative impact on their shareholders. The objective of the revision is to enhance flexibility of raising capital and to activate plunging stock market.

Under the current environment, capital increased by public offering leads to drastic decrease in EPS (earnings per share), and current shareholders will gain loss from their stock. TSE will revise listing regulation by the end of the year so that companies can flexibly set capital increase and raise capital by allocating new share subscription right to their shareholders. This kind of method is called Right Issue in overseas stock market, and in Europe, this method is used to raise approximately 60% of total capital raised.