As Japan accelerates its "Nippon Individual Savings Account" (NISA) reform, domestic companies are aligning with regulatory demands to abandon their long-standing strategy of cross-shareholding. According to JPMorgan, selling off these cross-held shares could free up capital for stock buybacks, further enhancing shareholder value.
Four Major Insurers to Sell Honda Shares
On Tuesday, reports surfaced that Tokio Marine & Nichido Fire Insurance, Sompo Japan Insurance, Mitsui Sumitomo Insurance, and Aioi Nissay Dowa Insurance, all under the MS&AD Insurance Group, plan to strategically reduce their holdings in Honda.
Including other financial institutions with similar plans, approximately 500 billion yen ($3.1 billion) worth of Honda shares will be sold at current prices. To mitigate market impact, the sales will be conducted in phases.
Honda has announced plans to repurchase up to 300 billion yen of its shares within the fiscal year to absorb some of the impact from these strategic sales.
Securities filings indicate that as of March this year, these four insurance companies or their parent firms held over 300 billion yen in Honda shares. This includes 161 billion yen held by Tokio Marine, 81 billion yen by Sompo Japan, 73 billion yen by Mitsui Sumitomo, and 28 billion yen by Aioi Nissay Dowa.
Collectively, these four insurers hold 900 billion yen in cross-shareholdings, with significant positions in companies like Toyota, Shin-Etsu Chemical, and Itochu Corporation.
Honda's own cross-shareholding list includes nearly 50 companies, such as Renesas Electronics, Mitsubishi UFJ Financial Group, and Tokio Marine Holdings.
Cross-shareholding, where companies mutually hold each other's shares, has been a symbol of interdependence among Japanese firms and a way to solidify business relationships. However, some analysts argue that this practice hampers corporate management and capital efficiency, thereby depressing the valuation of Japanese stocks.
Strategic Sales to Pave the Way for Stock Buybacks
Although Honda's stock price may face short-term pressure from the insurance companies' divestments, the long-term dismantling of the cross-shareholding system is considered a significant positive for Japanese stocks.
According to earlier reports citing JPMorgan's analysis, the total market value of strategic holdings increased from 51 trillion yen to approximately 60 trillion yen by the end of the 2023 fiscal year, accounting for about 10% of the Japanese stock market. This implies that a substantial amount of stock could be released into the market, increasing liquidity.
JPMorgan noted that strategic sales not only provide cash flow for holding companies but also allow these companies to use the proceeds for stock buybacks, thereby improving return on equity (ROE) and capital efficiency, creating shareholder value. Meanwhile, the companies being sold might also conduct buybacks to counter the market impact, further enhancing ROE.
JPMorgan projected that if strategic holdings decrease to 20% of their current levels over the next five years, Japanese companies' ROE could increase by more than one percentage point.
In the 2023 fiscal year, Japanese companies executed stock buybacks totaling 9 trillion yen, significantly higher than the 4 trillion yen in strategic sales, indicating a strong willingness to use the proceeds for self-buybacks.
Notably, in the 2022-2023 fiscal year, 50% of the companies that reduced strategic holdings had stock buyback amounts exceeding the cash received from sales, which not only boosted capital efficiency but also conveyed confidence in their intrinsic value to the market.
JPMorgan also indicated that the third wave of strategic sales in Japanese stocks has begun in 2024, suggesting this may be the final phase of such sales by Japanese companies.
Data shows that during the 2015-2017 fiscal years, the annual pace of strategic sales was approximately 2-3 trillion yen, which increased to 3-4 trillion yen from the 2018 fiscal year onward. At the 2023 fiscal year's pace (around 4 trillion yen), it would take about 15 years to complete all sales.
However, given the proactive actions by major sellers like Toyota and non-life insurance companies, as well as upcoming disclosure investigations by Japan's Financial Services Agency, JPMorgan expects this timeframe to potentially shorten to 5-7 years.
