Daily Brief Japan: Oriental Land, Japan Airlines, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Nikkei 225 Index Rebalance: Oriental Land, Renesas, JAL IN; Toyobo, Nippon LightMetal, Toho Zinc OUT
Nikkei 225 March 2023 Review – OLC, JAL, Renesas IN.
What Should a Japanese Company Do to Raise Profit Margin, a Prerequisite for Higher ROE?

Nikkei 225 Index Rebalance: Oriental Land, Renesas, JAL IN; Toyobo, Nippon LightMetal, Toho Zinc OUT

Oriental Land (4661), Renesas Electronics (6723) and Japan Airlines (9201) will replace Toyobo (3101), Nippon Light Metal (5703) and Toho Zinc (5707) in the Nikkei 225 (NKY INDEX).
Oriental Land (4661 JP) has been added at a post-split PAF of 1. This reduces the passive buying on the stock by around a third.
Passive trackers need to buy between 2.2-6.7 days of ADV on the adds while selling between 5-12 days of ADV on the deletes. There’s a big funding trade too.

As expected, Oriental Land (4661 JP), Renesas Electronics (6723 JP), Japan Airlines (9201 JP) IN, and Toyobo (3101 JP), Nippon Light Metal (5703 JP), Toho Zinc (5707 JP) OUT.
The Nikkei implemented the “Tricky Twist” discussed. This lowers the total amount to buy on Oriental Land vs what many would have expected.
That’s “disappointing” BUT… the behavioural aspects here are really interesting, and the timetable for the event is worth thinking about.

TSE, as market operator, should focus on stimulating the market, not informally meddling in the management of listed companies on matters that are not explicitly stated in the listing criteria.
Much of the reason ROE has not increased is that OP Margin has not increased. Despite gradual unwinding of cross-shareholdings, Total Asset Turnover slide and Financial Leverage remained unchanged.
Increasing OP Margin is prerequisite for ROE to rise. It confirms that the root of the problem is the challenge of using cash for growth investments to create competitive products.

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