Key facts
- Japanese companies' return on equity (ROE) decreased in the fiscal year ending March.
- Despite the ROE decline, companies reported record profits.
- A weak yen increased the reported equity value of overseas investments.
- The Tokyo Stock Exchange has been pushing for corporate governance reforms since March 2023.
- Aggregate share buyback authorizations for Prime Market companies surpassed ¥17 trillion in FY2024.
Return on equity (ROE) for Japanese listed companies declined in the fiscal year ended March, despite a surge in record profits. The depreciation of the yen inflated the value of overseas investments and subsidiaries, thereby increasing shareholders' equity and consequently lowering the ROE metric. This trend was particularly pronounced for general trading houses like Itochu and Mitsui & Co., which saw significant translation adjustments from their global holdings.
The Tokyo Stock Exchange (TSE) has been urging companies to improve corporate governance and capital efficiency since March 2023. In response, many firms have disclosed share buybacks, begun unwinding cross-shareholdings, and provided more detailed capital efficiency disclosures. Aggregate buyback authorizations for companies listed on the TSE's Prime Market exceeded ¥17 trillion in fiscal year 2024, and the median ROE for these constituents rose to an estimated 10% in the same period. However, this figure remains below the MSCI World median of approximately 14%, and roughly 45-50% of Prime Market companies still trade below a price-to-book ratio of 1.0x.
Previous governance initiatives, such as the Abenomics-era Stewardship Code and Corporate Governance Code, and the JPX-Nikkei 400 index, had produced only modest aggregate ROE improvements. The TSE's 2023 ultimatum aimed to create more substantial change, signaling that incremental pressure was insufficient to address the structural anomaly of Japanese companies trading below book value.