April 19, 2018

Japan entering a new era of capital efficiency

Summary

For years, ROE among Japanese companies languished in low single digits. No more. The average ROE rose to 9.1% in the fiscal year 2017, clearing the 8% "minimum" target set by the influential government-commissioned Ito Report published in 2014. The Japanese companies managed to raise their ROE not through financial leverage but through higher ROA and fatter profit margin. We find it remarkable that non-manufacturers, long considered an inefficient part of Japan Inc. are enjoying an unprecedented level of ROA in recent years. In our view, the rise in ROE is combined results of the cyclical upturn in the economy and the improvements in the corporate governance in Japan.

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