Japan Working Up an Appetite for U.S. Equities

Occidental Petroleum’s listing last month on the Tokyo Stock Exchange kicked off a year-end flurry of U.S. firms making their debut on the exchange.

The Los Angeles-based petroleum company was joined by K mart, Southern California Edison, Avon Products, American Family Corp., Squibb and Lincoln National Corp.

The increasing number of American firms trading on the exchange reflects a liberalization of Japanese securities laws and a rising interest among Japanese investors in foreign stocks. In addition, the dollar’s decline against the yen has made U.S. stocks more attractive.

“The nitty-gritty of this trend is the Japanese investor’s appetite for foreign, particularly U.S., equities,” explains Tony Sagiuchi, vice president at Nikko Securities Cos. International in New York.

“The Japanese financial community has gotten to be very substantial. The initial impact was on the U.S. government debt market. Now there is more and more interest in the equities markets,” says Orren F. Knauer, director of investor relations at K mart in Troy, Mich.

American firms account for 60 of the 88 foreign firms listed on the exchange, which includes a total of 1,500 companies, according to Hitoshi Yagi, general manager at the TSE office in New York. In 1984, only 11 foreign companies, 10 from the United States, were listed.

Volume of foreign stocks traded from January through October, 1987, totaled 723.9 million shares, compared to 309.7 million shares for all of 1986 and 131.4 million shares in 1985.

Scott Pardee, vice chairman of Yamaichi International (America) Inc., estimates that an additional 25 U.S. companies will be added to the TSE in 1988. “The pace will slow a little bit because Japanese investors are a little more cautious now.”

Long Qualifying Period

Those Japanese investors with stock in U.S. firms saw their portfolios decline in value with the Oct. 19 stock market crash. But for bargain hunters who stayed out, U.S. stocks are even cheaper now and there are more to choose from.

Market watchers say the boom in year-end listings of U.S. firms on the TSE had little to do with the market’s drop. Instead, the flurry of listings is the result of the exchange’s procedures to qualify, which take about six months.

The TSE no longer requires dual audits, in Japanese and English, for a company. It has also extended trading hours in foreign firms to four from one and adjusted downward minimums for foreign stock purchases.

Nevertheless, when a foreign firm applies to the TSE, it must provide full-year audited results to the exchange and the Ministry of Finance. The material must be translated into Japanese and structured in a manner that is familiar to Japanese authorities.

Finally, a foreign company must have 1,000 Japanese investors holding its stock by the day the company is officially listed. That requires a foreign firm to make presentations to Japanese investors.

To achieve all this, a foreign firm “needs a sponsoring agent in Japan because they know all the contacts, know all people there and procedures,” explains Knauer at K mart.

For U.S. firms, for example, the process usually begins in spring, when audited financial data is available for the prior year. “For companies deciding now, they could list by next September,” says Pardee at Yamaichi.

The big four Japanese securities firms--Nomura, Daiwa, Nikko and Yamaichi--say there are major advantages to a TSE listing. It raises a company’s presence in Japan, and a company’s relationship with the Japanese investment and financial community will be heightened through the listing because it must make disclosures in Japanese.

Sagiuchi at Nikko says such a familiarity with the Japanese investment and financial community will help foreign firms should they want to tap Japanese capital markets. A few companies, such as American Express and Florida Power & Light, already had made public offerings when they were listed on the TSE, he said.

$100,000 Annual Fee

There is a downside, however. The cost for initial listing averages about $200,000. Thereafter, a firm must keep up its listing at $100,000 annually.

In addition, Sagiuchi says foreign firms must have the discipline to continue investor relations with annual presentation meetings and provide updates in Japanese.

Pardee at Yamaichi says some Japanese investors bought initial foreign offerings but sold then their shares because the offerings were not well sponsored.