Bridge over ocean
1 March 1996 Financial Analysts Journal Volume 52, Issue 2

Corporate Profitability and Stock Valuation in Japan

  1. Masasuke Ide

The coexistence of low corporate profitability and high valuations in the Japanese stock market is seemingly contradictory. The Japanese financial system, which provided low-cost debt and equity capital as a package to major corporations through stable, interlocking relationships between large financial institutions and borrowing companies was, in fact, a hidden key factor for the unprecedented economic success of Japan after World War II. As Japan's economy successfully completes its catch-up phase and enters a mature stage, the traditional financial system is becoming more of a liability than an asset for achieving new economic priorities. Pressures are building to transform the system into one based on purely financial investment emphasizing management efficiency and profitability of borrowing companies. How soon and in what form this transformation will take place remains to be seen.

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