Veteran Investor Says Japan’s Ballooning Benchmark Harms Market

(Bloomberg) -- In his 40 years of covering Japanese stocks, Toru Ohara has seen the Topix index swell from fewer than 1,000 members to more than double that today. That’s way too many, according to the former chief investment officer of Franklin Templeton Investments Japan Ltd.

Japan’s Topix is one of the few benchmarks down for the year, and is the world’s second-worst performer after Hong Kong in 24 major developed gauges tracked by Bloomberg. Many of the largest Topix members are trading below book value, a troubling sign the current system allows companies with poor profitability to stay listed, said Ohara. The Topix extended its decline for the year to 0.5% Thursday.

Japan Exchange Group Inc. is currently reviewing an overhaul of its stock benchmarks and bourses, a process that could take years to complete. A key focus is how the JPX can adopt stricter listing requirements to cut the number of stocks trading on the first section, which currently has 2,142 members.

“It’s keeping the market metabolism from functioning,” said the 65-year-old Ohara, who in July joined as an adviser to Mutual Relief Asset Group. after a stint as CIO at Okasan Asset Management Co. “It’ll look totally different if we have something like a ‘Strong 100’ to represent Japan,” he said in an interview in Tokyo.

Another factor distorting the market is the Bank of Japan’s continued purchases of exchange-traded funds as a part of its massive monetary easing policy, he said. By supplying a wave of liquidity to the market, the BOJ is helping unprofitable companies stay afloat and “why profitability isn’t improving,” and a reason that investors are staying away from local equities, he said.

The Topix started out as an index of 673 members when it was first introduced in 1968. The number of companies has increased almost 50% since the tech bubble burst in 2000, when the measure had 1,445 members.

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The JPX has tried before to create a smaller index to showcase Japan’s best and most profitable companies. The JPX-Nikkei Index 400 started with fanfare in 2014, on the back of buying by the nation’s giant pension fund. But analysts say the gauge has fallen out of favor with its performance trailing those of the Topix and the Nikkei 225 Stock Average.

These are “difficult times” for Japanese equities, said Ohara. Perhaps it’s time to think “about whether it’s right to decide the future of Japan with the Topix as the benchmark.”

To contact the reporters on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net;Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei, Tom Redmond

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