Tokyo Investors Focus on 'P/B Ratio'

Jan 31, 2024 | News On Japan

TOKYO - Since the beginning of the year, the Nikkei Stock Average has already risen by about 3,000 yen, creating interest among investors for stocks with a negative Price-to-Book Ratio (P/B ratio).

Tatsunori Kawai, Chief Strategist at au Kabucom Securities, explains, "P/B ratio represents the net assets per share. It's calculated by dividing the company's total assets by the number of shares. When the stock price falls below the per-share assets, it indicates that the share price is lower than the company's actual value."

Last year, the Tokyo Stock Exchange made an unusual request for companies with a low P/B ratio to improve their management.

This led to foreign investors pouring funds into these 'P/B ratio under one' stocks, seemingly supporting the stock rally since last year.

These P/B ratio under one stocks may seem undervalued, but experts urge caution.

Kawai warns, "There are reasons why stocks fall to P/B ratio under one. For instance, if a company is consistently unprofitable or has minimal profit growth, its stock price might remain stagnant. It's crucial to check whether the company is profitable. Assuming stocks are cheap simply because their P/B ratio is under one can be risky."

Dow Jones Industrial Average Continues at Highs

Similar to Japanese stocks, the Dow Jones Industrial Average in the New York stock market has also been maintaining high levels, setting record highs for four consecutive days.

An important indicator for predicting the future, the Federal Open Market Committee (FOMC), which decides the policy interest rate, is scheduled to meet from January 31 to February 1, Japan time.

Kawai comments, "Despite statements from the Federal Reserve Board members that there is no need for a rate cut at this time, the strength of the U.S. stock market suggests that it is factoring in expectations of economic recovery over rate cut hopes. I believe the rate cut might be postponed to around May or June rather than March."

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