Japanese corporates’ increased share buybacks could support markets

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Nov. 20 2020, Updated 4:45 p.m. ET

Increased share buybacks – Japanese companies are more shareholder-friendly, as the government pushes to strengthen corporate governance. Stock buybacks have reached their highest level in six years in an effort to boost return on equity.

Market Realist – As per BlackRock estimates, Japanese companies (EWJ) give lower returns on equity (or ROE) than their U.S. counterparts (SPY). Japanese companies on average give an ROE of 8%—lower than the average 15% given by U.S. corporates. Analysts have often attributed this trend as one of the reasons why Japanese equities trade at a discount to US (IVV) equities historically. The lower ROE could be because of a variety of problems, including overregulation and inadequate corporate governance.

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Market Realist – As per Russ Koesterich and Heidi Richardson, share buybacks and rising dividends have become popular measures to boost the ROE of Japanese companies. The graph above shows the aggregate buybacks announced by TOPIX (the Tokyo Stock Price Index) corporates. The year-to-date aggregate alone stands at JPY 3,410 billion—much higher than the levels we’ve seen in the past six years.

The objective behind the increase in buybacks is very different from that during the U.S. financial crisis of 2008 (XLF), when buybacks aimed at preventing freewheeling drops in stock prices. The objective is to maximize shareholder returns and strengthen corporate governance.

Share buybacks and repurchase programs are helping lift the equity markets and are likely to keep supporting prices over the next few months.

Read on to the next part of this series to learn the key takeaways for investors.

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