Key points

  • TSE's request is not a regulatory obligation. On the other hand, it targets all listed companies in the prime and standard markets and requires continued responses from the board of directors and management.
  • TSE does not have a uniform target of PBR exceeding 1x. The request is for companies to analyze their cost of capital, returns on capital and market valuation, and to implement and update specific measures to improve corporate value.
  • Stock buybacks and dividend increases are also options, but it is not expected that this alone will be the only response. Research and development, human capital, capital investment, business portfolio, and balance sheet need to be reviewed all at once.

TSE request on March 31, 2023

On March 31, 2023, the TSE requested all listed companies on the Prime Market and Standard Market to "take measures to realize management that is conscious of cost of capital and stock prices." It is not a formal rule change, and there are no penalties for violations. TSE itself has clearly stated that “this is not a regulatory obligation.”

Nevertheless, this request had a significant impact on corporate practice. The reason is that the target was not limited to companies with a PBR of less than 1 times, but all companies in both markets. Even companies with high stock prices were required to understand the cost of capital and return on capital, consider market evaluations at board meetings, and continue efforts toward improvement.

The trends indicated by TSE can be summarized into the following three points.

  1. Analyze the current situation. Understand the market evaluation of your company's cost of capital, return on capital, PBR, etc., and analyze and evaluate it at the board of directors.
  2. Formulate, disclose and implement improvement measures. Realize and present to investors a plan that will lead to improved return on capital and growth expectations.
  3. Updated based on dialogue. Don't just announce it once and call it a day; review your efforts based on progress and investors' opinions.

Why did PBR below 1x attract attention?

The background to this request was the low PBR and ROE of Japanese companies. TSE materials show that even in the prime market, about half of the companies have a PBR of less than 1 times, and many companies have an ROE of less than 8%.

PBR is an index calculated by dividing stock market capitalization by book value of equity. If the ratio is less than 1, it cannot be simply concluded that the value would be higher if the company was dissolved. This is because there are intangible assets that are not included in book value, as well as taxes and expenses when selling assets. Still, it is an important clue that the market may be cautiously evaluating future earnings power and capital allocation.

When a company's PBR falls below 1x, what the board of directors should be asking is not, "How can we raise the stock price to 1x?" More specifically, the question is:

  • Does the current ROE exceed the cost of shareholders' equity?
  • Is that level temporary or sustainable?
  • Where are unprofitable businesses and idle assets located?
  • Is it being communicated to the market that growth investments will lead to future cash flow?
  • Is the allocation of shareholder returns and growth investments appropriate from the perspective of corporate value?

Breaking down PBR and thinking about it

The following identity is often used when considering PBR.

PBR = ROE × PER

Stock price/Net assets per share = (Earnings per share/Net assets per share) x (Stock price/Earnings per share)

Based on this formula, the reasons for low PBR can be broadly divided into two. Either ROE, which indicates current profitability, is low, P/E, which indicates the market's assessment of future profit growth and sustainability, or both.

However, PBR of more than 1x and ROE exceeding the cost of shareholders' equity are not unconditionally true. In the residual income model, if the market expects that ROE will exceed the cost of equity capital in the future, PBR will likely exceed 1x, and if it expects it to fall below, it will likely fall below 1x. Actual stock prices are also affected by factors such as growth rate, business risk, accounting book value, and non-business assets.

Therefore, although equity spread (ROE - cost of equity) is a powerful diagnostic indicator, it is not the only variable that mechanically determines PBR. Disclosures should not oversimplify the formula and should be tied to the company's business structure and future plans.

Continuous efforts required by TSE

What is important about this series of efforts is that disclosure is not the goal. Disclosure is a means of making it possible for external parties to check analysis by the board of directors, implementation at the business site, and dialogue with investors.

TSE cites research and development, human capital, capital investment, and business portfolio reviews as specific examples. As a result of analyzing the balance sheet, it may be determined that share buybacks or increased dividends are effective, but rather than a temporary measure that only returns profits to shareholders, TSE expects fundamental measures to sustain returns on capital above the cost of capital.

What the request does not specify

Deadline for achieving 1x PBR

The request does not specify that the PBR should exceed 1x by what year. PBR is determined by the market, so it is not a goal that the company can directly control. Companies should manage profitability, growth investments, business portfolio, capital structure, disclosure and dialogue.

Uniform ROE target

ROE of 8% is an important guideline indicated in the Ito report, but it is not the level required by the TSE for all companies. If business risks and capital structures differ, the cost of equity will also differ. The basic idea is for each company to reasonably estimate its own cost of capital and aim for profitability that exceeds that cost.

Uniform dividend payout ratio and treasury stock acquisition amount

TSE does not set numerical standards for dividend payout ratios or share buyback amounts. Return is an item of capital allocation that is determined after comparing growth investment and financial soundness.

Uniform disclosure deadline

There was no specific deadline for the start date, and a request was made to respond “as quickly as possible.” Since then, the list of disclosed companies has been published monthly, and the period in which it is listed as “under consideration” has been limited to six months, making it necessary to continually update it in practice.

Why the request became established in practice

Starting in January 2024, the TSE has been publishing a monthly list of companies that have made disclosures based on requests. From 2025, the period under consideration will be limited to six months, and from 2026 it will also be possible to check the disclosure content of corporate governance reports on a list.

Furthermore, in addition to good examples, it also publishes “cases that have a gap with investors' perspectives” and examples of companies' efforts to solve problems. As a result, companies can now be compared not only on “what they have disclosed,” but also on “whether investors can read and understand the content,” and “whether they are implementing and updating their announced plans.”

In April 2026, the request was updated, and the appropriate allocation of management resources was once again placed as a central issue. In August 2026, a list of companies that investors evaluated as “making progress in initiatives” was also published. The role of the TSE is not to impose numerical targets, but rather to provide a common platform for comparison and dialogue between companies and investors.

Suggestions for IR personnel

  1. Don't make PBR a standalone goal. Changes in PBR are explained by dividing them into ROE, growth expectations, risks, and capital structure.
  2. Link cost of capital estimates to board discussions. Don't just put calculations in the finance department; show how they are used for investment decisions, withdrawal decisions, and return policies.
  3. Disclosure will be updated as progress report. Do not reprint the initial materials every year, but clearly state the difference from the target, measures taken, and changes based on dialogue with investors.
  4. Shareholder returns are shown in the same table as growth investments. Explain dividends, stock buybacks, research and development, capital investment, M&A, and human capital as one capital allocation policy.
  5. Inspected based on the latest materials from TSE. Check not only the 2023 request, but also the 2025 case study, 2026 request update, and investor survey.

Source/reference materials

Related articles

  • 1.1---Why "ROE 8%" became the standard for reform
  • 2.2—Revised in 2018—Turning point when cost of capital was specified in the code
  • 3.1---From 4 categories to 3 categories---Market reorganization in April 2022
  • 4.2---WACC/ROIC/Equity Spread---Basic terminology of cost of capital management
  • 4.3 - List of companies disclosed on the TSE - Discipline created by public disclosure
  • 4.4—Seven pitfalls to avoid when disclosing cost of capital
  • 4.5—From disclosure to implementation—April 2026 request update