August 2024SPARX Japan Value Creation Strategy Increasing Delisting: The New Metabolism of the Japanese Stock Market

Key Points

Increasing Delisting: The number of delisting in Japan, driven by corporate actions such as MBOs, is on track to surpass IPOs in 2024, indicating a rise in the market's metabolism and a potential decrease in the total number of listed companies.

High Number of Small-Cap Companies: Japan has a relatively large number of listed companies, many of which have small market capitalizations, leading to a mixed market of high and low-value companies.

Challenges of Listing: While listing facilitates capital raising and enhances credibility, it also limits management freedom, making going private a viable option for companies with limited benefits from remaining publicly listed.

Increasing Delisting Expected to Surpass IPOs

The stock market and its participants are expected to provide funding opportunities to companies with growth potential while encouraging the exit of companies with capital efficiency issues from the market. This, in turn, is anticipated to enhance the market's metabolism and ultimately drive the revitalization of the Japanese economy.

While the number of IPOs (Initial Public Offerings) in Japan has remained around 100 annually, the number of delisting due to corporate actions (such as MBOs, full subsidiary acquisitions by listed companies, and M&As) has been increasing. In 2024, the pace of delisting suggests that more than 100 companies may go private, indicating a rise in the market's metabolism. It seems increasingly likely that companies finding less significance in maintaining their public listings are opting to delist, with the number of delisting potentially surpassing the number of IPOs, which could lead to a decrease in the total number of listed companies in Japan.

Enhancing Stock Market Metabolism for Economic Revitalization

Japan's market is characterized by a relatively high number of listed companies. The number of companies listed on the U.S. market is about 4,300, whereas Japan has approximately 3,900 listed companies. Considering the difference in market size, it becomes apparent that Japan has a relatively large number of listed companies. As of April 1, 2024, there are 176 companies in Japan's Prime Market with a market capitalization exceeding 1 trillion yen. However, the median market capitalization in the Prime Market is 96 billion yen, in the Standard Market 8.2 billion yen, and in the Growth Market 5.9 billion yen, indicating that many companies have relatively small market capitalizations. Consequently, Japan's stock market is often described as a mixed bag of valuable and less valuable companies. Issues such as the small scale of market capitalization and capital raising at the time of IPO, as well as the lack of market capitalization growth post-IPO, have been pointed out.

Private companies can benefit from listing on the stock market by facilitating smooth capital raising and enhancing social credibility and recognition. However, listing also means transitioning from being owned by a few specific shareholders to being owned by many. This transition necessitates the pursuit of joint shareholder interests rather than the interests of specific shareholders, which limits the freedom of corporate management. If fundamental management reforms can only be carried out under a few specific shareholders, or if the significance of remaining listed is weak, going private becomes a viable option. Given the increasing trend of companies going private, it appears that more companies are opting for this route.

By enhancing the metabolism of the stock market, we expect that funds will flow to more attractive companies, leading to the revitalization of the Japanese economy.

Note: Management Buyouts (MBOs) involve a company's management team purchasing the company's shares from existing shareholders to gain control, often resulting in the company going private (delisting).

Important Disclaimer

This content has been prepared by SPARX Asset Management Co., Ltd. (SAM) for information purpose only. Certain information contains economic trends and performance, however, SAM does not warrant the accuracy or completeness of such information, and accept no liability whatsoever for any direct or consequential loss arising from any use of this content. The views and opinions contained herein are based on then-current beliefs of the authors and are subject to change without notice. Furthermore, it should not be assumed that past performance is an indication of future results.