EV/EBITDA Sector-Relative Value on Japan: Value That Needs Government

We ran a sector-relative EV/EBITDA screen on 19 years of Japanese stock data from JPX (Tokyo Stock Exchange). The signal: buy when a stock's EV/EBITDA falls below 70% of its sector median, filtered for quality. The result: 3.64% CAGR vs 7.64% SPY, -4.00% annual lag. Japan is the world's most famous deep value market. But sector-relative EV/EBITDA discounts in Japan don't close on market logic. They close when the government forces them to. And the signal can't time that.

Contents

1. Method
2. The Screen
3. Sector-Relative EV/EBITDA Screen for JPX (SQL)
4. What We Found
5. 19 invested years. -4.00% annual lag vs SPY. Two policy-driven exceptions.
6. The two years that matter: 2013 and 2023
7. Year-by-year returns
8. Why Japanese discounts are structural
9. 2013: Abenomics forced the close
10. 2023: TSE governance pressure
11. 2018: the painful year
12. Backtest Methodology
13. Limitations
14. Conclusion

Method

Financial data sourced from key_metrics_ttm for EV/EBITDA and market cap, financial_ratios_ttm for debt metrics, profile for sector classification. 45-day lag on all financial statements to prevent look-ahead bias.

The Screen

Sector-Relative EV/EBITDA Screen for JPX (SQL)

WITH universe AS (
 SELECT k.symbol, p.companyName, p.exchange, p.sector,
 k.evToEBITDATTM AS ev_ebitda, k.returnOnEquityTTM AS roe,
 fr.debtToEquityRatioTTM AS de, k.marketCap
 FROM key_metrics_ttm k
 JOIN financial_ratios_ttm fr ON k.symbol = fr.symbol
 JOIN profile p ON k.symbol = p.symbol
 WHERE k.evToEBITDATTM BETWEEN 0.5 AND 25
 AND k.returnOnEquityTTM > 0.08
 AND (fr.debtToEquityRatioTTM IS NULL OR (fr.debtToEquityRatioTTM >= 0 AND fr.debtToEquityRatioTTM < 2.0))
 AND k.marketCap > 20000000000
 AND p.sector IS NOT NULL
 AND p.exchange IN ('JPX')
),
sector_medians AS (
 SELECT exchange, sector,
 PERCENTILE_CONT(0.5) WITHIN GROUP (ORDER BY ev_ebitda) AS median_ev_ebitda,
 COUNT(*) AS n_sector_stocks
 FROM universe GROUP BY exchange, sector HAVING COUNT(*) >= 5
)
SELECT u.symbol, u.companyName, u.exchange, u.sector,
 ROUND(u.ev_ebitda, 2) AS ev_ebitda_ttm,
 ROUND(sm.median_ev_ebitda, 2) AS sector_median_ev_ebitda,
 ROUND(u.ev_ebitda / sm.median_ev_ebitda, 3) AS ev_ratio_to_sector,
 ROUND((1 - u.ev_ebitda / sm.median_ev_ebitda) * 100, 1) AS discount_pct,
 ROUND(u.roe * 100, 1) AS roe_pct,
 ROUND(u.de, 2) AS debt_to_equity,
 ROUND(u.marketCap / 1e9, 2) AS mktcap_b
FROM universe u JOIN sector_medians sm ON u.exchange = sm.exchange AND u.sector = sm.sector
WHERE u.ev_ebitda / sm.median_ev_ebitda < 0.70
ORDER BY u.ev_ebitda / sm.median_ev_ebitda ASC LIMIT 30

Run this screen on Ceta Research

What We Found

19 invested years. -4.00% annual lag vs SPY. Two policy-driven exceptions.

The 6 cash periods at the start (2000-2005) reflect genuine data thinness. JPX's FY financial data in the FMP warehouse becomes reliably populated only from around 2006 onward. The effective track record is 19 years.

The down-capture of 65.84% provides some protection in bad years, which is the one positive observation. But MaxDD -46.87% is still worse than SPY's -34.90%.

The two years that matter: 2013 and 2023

Japan's 19-year invested record includes two standout years:

Both years were driven by government/exchange policy that forced Japanese companies to close their valuation discounts. Both produced exceptional excess returns. Neither was something the sector-relative EV/EBITDA signal could have predicted.

This is the core problem with value investing in Japan: the discounts are real, but they require an external catalyst to close. Without that catalyst, they persist for years.

Year-by-year returns

Why Japanese discounts are structural

Japan has the world's most extensively documented corporate governance problem. The specific mechanisms that keep EV/EBITDA discounts persistent:

Keiretsu cross-shareholdings. Large industrial groups hold each other's shares as relationship anchors. These cross-holdings suppress activist pressure, reduce management accountability to outside shareholders, and keep capital allocation decisions internal to the group. Companies with cross-held shares trade at structural discounts because investors price in the governance drag.

Zombie company prevalence. Japan's banking system has historically supported loss-making or low-return companies to preserve employment. These companies populate sector rosters and pull sector medians down. The "sector median" EV/EBITDA may itself reflect the universe of poorly-governed companies rather than a fair benchmark.

Cash hoarding. Japanese companies have historically accumulated cash rather than returning it to shareholders. A company trading at 5x EV/EBITDA with ¥500B in cash on its balance sheet isn't cheap by accident, it's cheap because that cash will likely stay on the balance sheet indefinitely rather than be deployed or distributed.

Low ROE culture. Despite the quality filter (ROE > 8%), the broader Japanese corporate culture of prioritizing employment stability and supplier relationships over shareholder returns means that even companies that pass the ROE filter may not aggressively close their valuation gaps.

2013: Abenomics forced the close

Prime Minister Abe's reflation program and the Bank of Japan's QE in 2013 drove the yen weaker and boosted corporate earnings for Japanese exporters. More importantly, Abenomics explicitly targeted corporate governance reform, asking companies to increase ROE and return capital to shareholders. The JPX-Nikkei Index of corporate value was introduced to highlight companies trading below book value.

The result: +44.9% return, +17.2% excess vs SPY. It worked. But the catalyst was explicit government policy, not market-driven mean reversion.

2023: TSE governance pressure

In 2023, the Tokyo Stock Exchange took direct action by identifying all listed companies trading below 1x book value and requiring them to submit improvement plans or face delisting reviews. Companies with EV/EBITDA discounts to sector peers were among those most exposed to this pressure. Management teams that had ignored valuation gaps for years suddenly had regulatory incentive to close them.

Result: +44.6%, +18.6% excess. Again, a policy catalyst.

2018: the painful year

The -27.2% in 2018 (-22.0% vs SPY) reflects JPY strengthening and global trade concerns hitting Japanese exporters. Companies that passed the sector-relative screen included many export-oriented industrials and cyclicals. When global trade concerns rose, those names fell harder than the quality filters could protect against.

Backtest Methodology

Full methodology: backtests/METHODOLOGY.md

Limitations

6 cash years (2000-2005) limit effective track record. The 19-year invested return is less reliable than a 25-year record for statistical significance. Missing 2003's +24.1% SPY year while in cash was a drag on the long-run comparison.

Two policy-driven outlier years dominate the result. Remove 2013 and 2023, and the strategy's 19-year CAGR is substantially worse. The positive return depends on two years of government-mandated discount closure.

MaxDD -46.87%. Worse than SPY's -34.90%. Japan's export-heavy market amplifies global manufacturing cycle downturns.

Currency effects. Returns are in JPY. The benchmark (SPY) is in USD. The yen has been in a prolonged weakening trend since 2012, which has depressed the relative performance of JPY-denominated returns for USD-based investors.

Governance improvement is ongoing but uneven. The TSE's 2023 reforms pushed some companies to act. Others remain in violation with no immediate consequences. The pace of governance improvement is uncertain.

Conclusion

Sector-relative EV/EBITDA on JPX delivered 3.64% CAGR over 19 invested years, -4.00% behind SPY annually. Japan is the world's most famous deep value market, but the discounts don't close on their own. They require the government to push.

The two best years in the record (2013: Abenomics, 2023: TSE reforms) both came from external policy pressure on companies to close valuation gaps. That's not how the strategy is supposed to work. Mean reversion is supposed to happen because market pricing is efficient and anomalies attract capital. In Japan, the anomalies persisted for decades because the mechanisms that force discount closure in Western markets, activist investors, hostile takeovers, capital return pressure, are all structurally weaker.

The ongoing TSE governance reforms could change this over the next decade. But a backtest covering 2006-2025 shows that the improvement is slow, episodic, and dependent on continued external pressure.

Part of a Series: Global | US | UK | Switzerland | India | Hong Kong | Germany | China

Run It Yourself

Explore the data behind this analysis on Ceta Research. Query our financial data warehouse with SQL, build custom screens, and run your own backtests across 70,000+ stocks on 20 exchanges.

Data: Ceta Research (FMP financial data warehouse). Returns in JPY (local currency). Benchmark S&P 500 in USD. Past performance doesn't guarantee future results. See full methodology at github.com/ceta-research/backtests.