IPO activity in Japan is set to gain momentum in 2024 after a subdued prior two years as the stock market rides high on the back of corporate governance reforms, earnings improvement and strong foreign investor interest.
Total equity listings by Japanese companies rose to 97 in 2023 from 94 in the previous year, though the tally was still lower than the 122 completed in 2021, according to S&P Global Market Intelligence data. Japanese companies raised ¥576.51 billion in aggregate IPO proceeds in 2023, compared to ¥349.68 billion in 2022 and ¥735.14 billion in 2021.
The technology, media and telecommunications (TMT) sector has been driving IPO activities in the Japanese stock market in the past few years, followed by the industrials and consumers sectors, respectively. TMT companies completed 39 IPOs in the country in 2023, compared to 38 in 2022 and 64 in 2021, Market Intelligence data shows.
"For now, there are no signs of downturn in the stock markets," said Katsumi Udagawa, manager of research and strategy department at Ichiyoshi Securities Co. "Foreign investors drive the markets by seeking to snap up undervalued Japanese stocks."
Investor interest surges
Investor interest in Japanese stocks has surged in recent months, helping drive the Nikkei 225 index to hit an all-time high of 39,233.71 on Feb. 26. The Tokyo Stock Exchange (TSE)'s corporate governance reform, the return of inflation after the COVID-19 and the Japanese government's revamp of the Nippon Individual Savings Account (NISA), a tax-free stock investment program for individuals, among other things, are driving this investor interest, RBC Wealth Management said Feb. 22.
In addition, foreign investors have been pouring money into the local equities market in hopes of higher returns, further driving trading activities. Foreign investors bought ￥2.090 trillion worth of Japanese stocks on a net basis in January, while local retail and institutional investors sold a net ￥2.351 trillion worth of stocks in the same month, TSE data shows.
Investors have been bullish on new listings. Solize Corp., an engineering services company, went public on Feb. 7, raising ￥1.46 billion on the TSE's Standard Market. The offering was well-received with an initial share price of ￥2,020, well surpassing the IPO price of ￥1,470.
"Obviously, we got a tailwind from the bullish Nikkei [225]," a Solize spokesperson said.
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Reforms, solid outlook
The TSE's reforms, announced in March 2023, are likely to help boost IPO activities on the local stock exchange as companies may embark on corporate restructurings, including carve-out IPOs, in an effort to shore up their capital efficiency.
As part of the reforms, the stock exchange asked Japanese companies with price-to-book value ratios below 1.0 to disclose specific policies and initiatives to lift their value as it sought to raise management awareness of capital costs and stock prices. The directive, although not binding, was also seen as an effort to draw more interest from overseas investors.
"The move should be a positive factor for IPOs as noncore assets have been carved out over the past years," said Masayoshi Zenpo, partner at Ernst & Young ShinNihon LLC.
In addition, Japan Inc. seems to be in a solid shape. A sample of 265 large Japanese companies are estimated to post a 15.1% increase in operating profit for the fiscal year ending in March 2024, according to a Nomura Securities Co. report released in December 2023. The companies' operating profit is expected to gain 8.9% in the fiscal year through March 2025.
The optimism is driven by the yen's depreciation against the US dollar, which benefits the country's exports, as well as favorable US market conditions.
Divergent monetary policies
A potential US rate cut would not only help drive the US stock markets but could serve as a tailwind for IPOs in Japan, as it would allow investors to raise funds at lower cost and allocate cash to the local equity market, analysts said.
The benchmark US stock indexes have booked strong year-to-date returns, with the Dow Jones Industrial Average Index reaching a new record high and closing at above 39,131.53 on Feb. 23.
"The US rates cut would become a tailwind for IPOs [in Japan]," Zenpo said.
On the contrary, any negative impact of a Bank of Japan rate hike, likely to happen as early as April, on IPO activities are expected to be limited. While the central bank has tightened monetary policy in effect by increasing its tolerance of higher long-term bond yields since December 2022, it has kept its benchmark interest rate at minus 0.1%, sticking with a negative interest rate policy first introduced in 2016.
While Japan's rates hike "could become a headwind temporarily," it won't hamper IPO activities, said Chizuru Morishita, a researcher at NLI Research Institute.