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Japan's 'good governance' index underperforms stocks it expelled


[TOKYO] A Japanese stock index launched over a year ago to spotlight companies with high return on equity and other marks of good governance has run into a quandary: stocks expelled last summer because they no longer met the criteria have far outperformed the companies that replaced them.

Thirty stocks removed from the JPX-Nikkei Index 400 , including Sony Corp and Yamazaki Baking Co, gained 27 per cent on average from Aug 28 to March 31, data compiled by Okasan Securities shows. That excludes Skymark Airlines Inc, which filed for bankruptcy protection. By contrast, their 31 replacements, such as Panasonic Corp and Mazda Motor Corp, gained only 10.8 per cent on average. Over the same period, the overall JPX-Nikkei 400 and Tokyo's benchmark Topix index of all shares on the main board both advanced about 20.5 per cent.

The result may be a disappointment for the government of Prime Minister Shinzo Abe, which wants Japan Inc to bolster its historically stingy returns to shareholders and attract more foreign investors. Japan Exchange Group Inc, which operates the Tokyo Stock Exchange, and Nikkei Inc formulated the JPX-Nikkei 400 index to encourage companies to focus on shareholder interests, by setting strict membership criteria that include a solid three-year performance in return on equity and operating profit.

The new index was adopted as a benchmark by the trillion-dollar Government Pension Investment Fund, and several asset management firms have launched funds tracking it.

The strong performance by Sony and others after exiting the index, however, has led to calls for tweaking the membership requirements, for example looking at 10 years of financial data instead of three to get a more long-term view of performance. The next annual review of index constituents is set for August.

But investors have welcomed the index, hopeful that it will improve governance, which should boost returns in the long run, and keen for more diversified investment vehicles. Masataka Kurita, senior quantitative analyst at Okasan Securities who compiled the data, said the index has raised management's awareness of ROE.

But he cautioned that any measurement of past performance - as reflected in the index - is no guarantee of future returns. "Corporate financial data is a piece of information reflected in the rear-view mirror," he said.


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