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Japan’s ‘Quality’ Index Drives Investor Returns, Study Finds

Japan’s ‘Quality’ Index Drives Investor Returns, Study Finds

Sep. 07, 2017

Sep. 07, 2017

Japan’s efforts to have companies boost investor returns – by means of including them into a ‘prestige’ or ‘quality’ index – may be bearing fruit.

Membership in the JPX-Nikkei 400 Index, a government-backed benchmark for Japanese businesses with high shareholder returns and good corporate governance, led firms to increase return on equity (ROE) by an average 35% in the last five years, according to a Harvard Business School study.1 This was accomplished by means of improved profit margins, operating efficiency and shareholder payouts, the paper said.

“Membership in a stock index can serve as a source of prestige that can thereby motivate managers and influence corporate behavior,” the paper’s authors, Akash Chattopadhyay, Matthew D. Shaffer and Charles C.Y. Wang, wrote. Chattopadhyay is a professor at the University of Toronto, while Shaffer is a doctoral candidate and Wang a professor at Harvard Business School.  

‘Abenomics’ pushing for corporate change

Since returning to power in 2012, Prime Minister Shinzo Abe has pushed for change in the form of a three-arrow economic plan consisting of large fiscal stimulus, aggressive monetary easing and structural reforms. Part of the reform package is a plan to cut the corporate tax rate and to require companies to adhere to a corporate governance code and target higher ROE.

A STOXX index that rewards increased corporate governance and returns

STOXX Ltd. and Mitsubishi UFJ Trust & Banking (MUTB) in 2015 jointly developed the iSTOXX MUTB Japan Quality 150 Index, which, like the JPX-Nikkei 400, is aimed at benefitting from ‘Abenomics.’

Selecting companies based on returns to shareholders and profitability, the iSTOXX MUTB Japan Quality 150 Index even raises the bar a couple of notches by adding criteria such as cash-flow generation and by leaving out qualitative assessments, with the ultimate outperformance effect compared to the JPX-Nikkei 400, as seen below in Chart 1.  

An opportunity to recreate governance incentives elsewhere in Asia

While the authors concluded that there is no evidence to suggest the incentives can be sustained once companies have a secure rank in ‘prestige’ indices, the findings show that the indices are a strong pull for wealth creation for a large universe of aspiring businesses.

“The evidence provided in this paper constitutes initial evidence that prestige-based incentives can be powerful in transforming corporate governance norms in settings like Japan,” the authors wrote. “These findings can inform corporate governance reform efforts in capital markets that also have similar patterns of low capital efficiency and weak de facto shareholder rights, for example other East Asian economies like China, Korea, Singapore, or Taiwan.”

Featured indices

iSTOXX MUTB Japan Quality 150 Index

1 Chattopadhyay/Shaffer/Wang, Governance through Shame and Aspiration: Index Creation and Corporate Behavior in Japan (Harvard Business School, July 2017).


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