Tokyo Stock Exchange must weed out underperforming firms

Tokyo wants to become Asia's top financial hub, but faces big obstacles. Among them, the presence of too many companies with low profitability and growth prospects.

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The Tokyo Stock Exchange faces significant obstacles in its quest to become Asia’s top financial center. Many firms listed on the TSE have low profitability and growth prospects. As a result, about half of them have price-to-book ratios (PBRs) — a measure of market valuation compared to book value — of less than 1.

The market is effectively saying that it would be better to just liquidate these firms and sell their assets. With the low stock prices that drive PBRs to less than 1, many of these firms have market capitalizations under ¥10-20 billion. At this level, many domestic and foreign fund managers’ policies do not allow them to buy these companies’ shares because they cannot count on sufficient liquidity in the market.



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