Abstract
This chapter presents the underpinnings of the book’s message. It addresses the issues of Return on Equity (ROE) in general and answers; What is ROE? Why is the ROE of Japanese firms the world’s second lowest? What is the benefit for investors and corporations of improving ROE? The chapter also correlates total shareholder return (TSR) and ROE, which investors regard as an alternate index of returns. FACTCAST points out that during the past five years the 5.6% ROE of Japanese firms is second lowest in the world behind Greece. Defining ROE as margins × leverage × turnover , DuPont attributes Japan’s low ROE to margins that are half those of US firms even though leverage and turnover resemble those in other countries. The book’s survey results show that improved ROE is a priority for investors: the 2014 pre-CG (corporate governance) reform survey indicates 62% of foreign investors and 48% of Japanese investors believe ROE is a crucial subject for dialogue with corporations. Post-CG reforms, 42% of foreign and 39% of Japanese investors hope the CG reforms will improve ROE. Over three decades, the TSR of Japanese corporations has averaged 6% and ROE 5%, whereas both averaged 12% in the US and Europe. This chapter closes by articulating the benefits of improved ROE for investors and Japanese companies and shows they can be synchronized to enhance corporate value.
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Notes
- 1.
The same tendency is observed in an ROA international comparison (Yanagi 2010). The remarkable changes are not observed on the rankings of international comparisons that exclude interest and tax rates.
- 2.
The global investor survey summary by Yanagi [2014b] is as follows: (Term) April 15–June 12, 2014; (Respondents) 110 funds had valid responses after approaching 200 core customers of UBS; (Response Rate) 55%, 50 overseas funds and 60 Japanese ones, for a total of 110 funds.
- 3.
The global investor survey summary by Yanagi (2015a, b, c) is as follows: (Term) February 1–March 6, 2015; (Respondents) 122 funds had valid responses after approaching 200 core customers of UBS; (Response Rate) 61%, 69 overseas funds and 53 Japanese ones for a total of 122 funds. The strategy by investors is highly confidential, so survey has uniqueness. However, the investors’ opinions change with various situations, thus continuous surveys would be required. The author has performed periodic surveys (Yanagi 2010, 2013a, b, 2014a, b, 2015a, b, c). Yanagi (2013a) is adopted by the Ito Review (METI 2014). The trends do not change remarkably and the results of the global investor surveys have a certain robustness.
- 4.
The premise is as follows: Stock price, P, is the total of the current value of future net profits, E (hypothesizing that they ultimately converge to 100% dividend payout ratio ); capital cost , r (the expected rate of return by investors); and the permanent growth rate of net profits, g. The formula is constructed as follows: \({\text{P }} = {\text{ E }} \div \, \left( {{\text{r}} - {\text{g}}} \right)\). Then divide both sides by E, \({\text{P }} \div {\text{ E }} = {\text{ PER }} = \, 1 \, \div \, \left( {{\text{r}} - {\text{g}}} \right)\). So, PER has a correlation with the inverse number of r − g. The following tendency is observed: r is high when g is high and r is low when g is low. That is why r − g is not different in the advanced countries. Therefore, PER is not very different.
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Yanagi, R. (2018). Abenomics Requires Enhancement of Corporate Value via ROE. In: Corporate Governance and Value Creation in Japan. Springer, Singapore. https://doi.org/10.1007/978-981-10-8503-1_3
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