Nomura Japan Equity Growth
Potential Index
EQUITY QUANTITATIVE RESEARCH

Index targets companies with growth potential

Global Markets Research
29 January 2019

Research analysts
Focus on efforts by institutional investors to encourage companies to achieve
continuous growth
The Nomura Japan Equity Growth Potential Index is an index that focuses on theefforts made by institutional investors to encourage the companies in which they haveinvested to achieve continuous growth. Over recent years the influence of institutional
investors has been growing in Japan. The index aims to systematically selectcompanies that have the potential to achieve growth in response to suchencouragement from investors, and to invest efficiently in these companies in order tobenefit from the returns that are generated as a result of future growth.

Japan quantitative research
Masako Yamamoto - NSC
masako.yamamoto@nomura.com+81 3 6703 1398
Yasuhiro Shimizu - NSC
yasuhiro.shimizu@nomura.com+81 3 6703 1748

We use factors based on financial indicators to determine a company's growth potential
in terms of both "room for growth" and "abundance of capital". "Room for growth" isassessed on the basis of levels of ROE and capex, while "abundance of capital" isassessed on the basis of levels of cash, debt, and free cash flow.
Historical index values have been calculated starting from the index base date of 31
August 2001. The index has historically performed well overall, but has recorded
particularly high returns since 2013, when the need for Japanese companies toimprove their "earnings power" and the role played by investors in encouraging
companies to achieve growth started to attract more attention.

Fig. 1: Nomura Japan Equity Growth Potential Index (31 August 2001 = 10,000)

60,00040,00020,0000Nomura Japan Equity Growth Potential Index
TOPIX
TOPIX Ex-Financials
Note: Shows data for September 2001 through December 2019. Based on monthly returns including dividends.
Transaction costs are not included. Analysis is based on past performance and does not guarantee future performance.
Source: Nomura

Japanese version published on
January 22, 2019
Production Complete: 2019-01-28 20:51 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Nomura Japan Equity Growth Potential Index

29 January 2019

1. Introduction
The Nomura Japan Equity Growth Potential Index is an index that reflects companies'
potential for growth.
In recent years it has been widely acknowledged that boosting Japanese companies'"earnings power" is a key issue for Japanese economic growth, and more and more
institutional investors have been actively encouraging the companies in which they haveinvested to take steps towards achieving continuous growth. The Nomura Japan Equity
Growth Potential Index aims to systematically select companies that have the potential toachieve growth in response to such encouragement from investors and demands fromsociety, and to invest efficiently in these companies in order to benefit from the returns
generated as a result of improvements in corporate value.
In Chapter 2 of this report we discuss the steps taken by the Japanese government andthe efforts made by institutional investors to encourage growth at Japanese companies,
which motivated us to develop the index. In Chapter 3 we set out the method used to
select stocks for the index, and explain the basis on which we determine which
companies have potential for growth.
In Chapter 4 we compare the performance of the index with the performance of the
TOPIX and the TOPIX Ex-Financials from 31 August 2001, its base date, through 31
December 2018, and consider the reasons for the differences in returns. In Chapter 5 welook at the composition of recent index constituents by size and sector, and in Chapter 6
we summarize the findings of this report.

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29 January 2019

2. Background of index development
Corporate governance reforms aimed at boosting Japanese companies' "earnings
power"
Japan has experienced a long period of weak economic growth, and there is growing
recognition of the urgent need to increase Japanese companies' productivity andinternational competitiveness in order to put the economy back on a path of continuous
growth. To this end, in its series of strategies under the names of "Japan Revitalization
Strategy” and “Investments for the Future Strategy", the Japanese government has since2013 been implementing various measures aimed at reforming corporate governance inorder to boost Japanese companies' earnings power.
Japan’s Stewardship Code (2014) and the Corporate Governance Code (2015) are key
examples of such measures. The aim of the former is that institutional investors will, via
engagement and the exercise of their voting rights, for example, work on the companies
in which they have invested to encourage them to achieve continuous growth, while theaim of the latter is to encourage companies to work towards continuous growth incooperation with their shareholders and other stakeholders. Both codes recommend thatinvestors work together with companies to ensure that companies achieve continuous
growth.
Efforts on the part of institutional investors aimed at encouraging companies togenerate continuous growth
Reforms such as these have led to a substantial change in the relationship between
Japanese institutional investors and companies.
In the past, major Japanese institutional investors tended not to have much involvementin the management of Japanese companies. Activists working aggressively to achieve
management reforms through the exercise of their rights as shareholders were in theminority. While there have in the past been instances of major conflict between
companies and their long-term shareholders, as in the case of Bull-Dog Sauce 1 in 2007,
in recent years this kind of conflict has been becoming less and less common.
Nowadays, it is often the case that activists' proposals are seen as likely to generate
profits either for the companies or for their shareholders and are either supported byother shareholders or serve as a trigger for corporate reforms.
Mainstream institutional investors—major pension funds and financial institutions—havealso started to work aggressively on the companies in which they have invested. Many
major Japanese institutional investors have already announced that they have signed up
to Japan's Stewardship Code 2 and are turning their attention to working on management
teams at the companies in which they have invested, in accordance with the stipulationsof the code.

1

In May 2007 Steel Partners launched a tender offer aimed at acquiring all the shares in Bull-Dog Sauce [2804].
In response to this, Bull-Dog Sauce became the first Japanese company to implement takeover defense
measures. Steel Partners sought an injunction to prevent Bull-Dog Sauce from issuing equity warrants, but theTokyo District Court rejected this. Steel Partners then immediately appealed to the Tokyo High Court, which ruledthat the takeover defense measures proposed by Bull-Dog Sauce were justifiable and that Steel Partners was an"abusive acquirer" seeking only its own gain by selling the shares on. Steel Partners' appeal to the Supreme Court
was also rejected and the company’s efforts thus ended in failure. After this, more and more Japanese companies
introduced takeover defense measures.
2

According to Japan's FSA, as of 14 December 2018 239 institutional investors had revealed that they signed up
to Japan's Stewardship Code.

3

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29 January 2019

Selective investment in companies with the potential to generate growth inresponse to requests
As a result of this change in stance on the part of investors, Japanese companies started
to receive requests to step up their management efforts to improve capital efficiency andboost profitability. These requests might also put pressure on companies but, atcompanies that are able to respond to them, we think that such requests are likely to act
as a powerful boost towards the achievement of growth.
The Nomura Japan Equity Growth Potential Index selects companies that have thepotential to achieve growth in response to this encouragement from investors, andenables efficient investment in these companies.

4

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29 January 2019

3. Factors used to determine whether or
not a company has potential for growth
Stock selection criteria
Figure 2 shows the criteria used to select stocks for the Nomura Japan Equity Growth
Potential Index, in the order in which they are applied. Criteria I through V in Figure 2 areapplied to the stocks in the stock selection universe, and stocks that meet all criteria areregarded as "compliant stocks". 3

Fig. 2: Nomura Japan Equity Growth Potential Index stock selection flow

Source: Nomura

3

Sometimes stocks that are already included in the index but do not meet criterion V are retained in the index, if
they meet certain criteria, in order to reduce the trading impact. See Nomura Japan Equity Growth Potential Index
rulebook for details.

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29 January 2019

Growth potential and abundance of capital
We use factors based on financial indicators to determine a company's growth potential
in terms of both "room for growth" and "abundance of capital". "Room for growth" isdetermined using criterion V in the stock selection flow set out above, and reflects levels
of ROE and capex. "Abundance of capital" is determined using criterion IV in the stock
selection flow set out above, and reflects levels of cash, debt, and free cash flow.
Determining room for growth (based on ROE and capex)
ROE shows how efficiently a company is using the funds raised from its shareholders togenerate profits, and is an indicator to which shareholders should pay particular attention
when assessing a company's earnings potential. Some indexes, such as the JPX-Nikkei
Index 400, prioritize stocks with a high level of ROE, but the Nomura Japan Equity
Growth Potential Index focuses on the potential for growth in ROE and therefore does
not select companies that have already achieved a high level of ROE (the lack of scopefor further growth in ROE is seen as a negative and such stocks are therefore excluded
from the index). Conversely, companies that currently have a relatively low level of ROE
are regarded as having substantial room for growth in ROE. Such companies are likely
to be the target of engagement by institutional investors looking for an improvement inearnings and are thus likely to see an improvement in ROE.
As well as ROE, we also take the level of capex into account when assessing acompany's room for growth. Because new capex is often required in order for a company
to improve its capital efficiency and increase its earnings potential, companies thatappear to have little scope to increase their capex are excluded in our screening.
Abundance of capital (based on cash, debt, and free cash flow)
To assess abundance of capital, we determine whether or not a company has funds tospare to invest in growth based on the level of cash (representing the stock of funds—
the more cash the better), debt (representing the ability to raise funds—the less interestbearing debt the better), and free cash flow (representing the flow of funds—the more
free cash flow the better).
In the stock selection flow set out above, abundance of capital is assessed before roomfor growth, because having an abundance of capital is assumed to be a major
precondition for achieving growth. Not only will a company not be able to boost its
earnings if it does not have capital to begin with, but its earnings could deteriorate further
if its financial base were to become weak. For this reason, stocks are selected for the
Nomura Japan Equity Growth Potential Index from a pool of stocks with an abundance ofcapital that is always above a certain level.
Has our stock selection method been successful?
Did the stocks selected for the Nomura Japan Equity Growth Potential Index using themethod set out above subsequently achieve growth?
The index undergoes a periodic reconstitution once a year, at the beginning of
September. Figure 3 shows how the financial indicators used to select stocks for theindex changed over the 12 months between the beginning of September, starting in
September 2001, and the end of August in the following year, for both the Nomura Japan
Equity Growth Potential Index and the TOPIX 4.

4

Here we used the TOPIX Ex-Financials in order to make a comparison with the Nomura Japan Equity Growth
Potential Index, which does not include financial stocks.

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29 January 2019

Fig. 3: Average change in financial indicators over 12 months

ROE
Capex to sales ratio
Cash to total assets ratio
Debt ratio
Free cash flow to total assets ratio

Average changeover 12 months:
Nomura Japan
Equity Growth
Potential Index
(a)
1.4%
0.4%
-0.3%
-3.6%
-0.4%

Average changeover 12 months:
TOPIX Ex-Fin

Averagedifference

(b)
0.3%
0.1%
0.1%
-5.5%
0.0%

(a) - (b)1.1%**
0.3%**-0.4%*
1.9%-0.5%**

2%
Nomura Japan Equity Growth Potential Index
TOPIX Ex-Fin
1%

0%

ROE

Capex/sales

Note: Figure shows the average of changes in financial indicators over 12-month periods from the beginning of September
to the end of August the following year for the 17 12-month periods from 2001 to 2017. The definitions of each indicator are
the same as those used for the selection of stocks for the Nomura Japan Equity Growth Potential Index. The averagechange in each indicator is the weighted average, with weightings based on the weighting of each stock in the respective
index. For average change, * indicates statistical significance at 5%, ** indicates statistical significance at 1%.
Source: Nomura

As Figure 3 shows, in the period between the selection of stocks in a periodic
reconstitution until the replacement of stocks in the next periodic reconstitution theconstituent stocks of the Nomura Japan Equity Growth Potential Index saw an increasein ROE that was significantly greater than that in the market as a whole, as represented
by the TOPIX Ex-Financials. These stocks also saw a significant increase in their level ofcapex relative to the market as a whole, and thus appear to have achieved growth byleveraging the room for growth they had when they were included in the index. In
addition, of the three indicators on which abundance of capital is based—cash, debt, andfree cash flow—there was no significant change in the average debt ratio, but the cash tototal assets ratio and the free cash flow to total assets ratio fell significantly, indicatingthat some of these stocks might have used cash or free cash flow to carry out capex orother measures aimed at generating growth. These changes in financial indicators thus
appear to indicate that our stock selection process generated the hoped-for results tosome extent.

7

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29 January 2019

4. Performance of Nomura Japan Equity
Growth Potential Index
Index values and excess returns
Figure 4 shows the performance of the Nomura Japan Equity Growth Potential Index
from September 2001 onwards. The index has performed well overall over this period,
but has recorded particularly high returns since 2013, when the need for Japanesecompanies to improve their "earnings power" and the role played by investors inencouraging companies to achieve growth started to attract more attention. Over the
past five years, the index has outperformed the TOPIX by 7.5ppt and the TOPIX ExFinancials by 6.6ppt (average annualized return basis).

Fig. 4: Performance of Nomura Japan Equity Growth Potential Index

60,000(%)
100

50,00080

40,00060

30,00040

20,00020

10,0000Index values (end-Aug 2001 = 10,000)

0

Cum ulative excess returns (end-Aug 2001 = 0%)-20

Nomura Japan Equity Growth Potential Index
TOPIX
TOPIX Ex-Fin

Nomura Japan Equity Grow th Potential Index – TOPIX
Nomura Japan Equity Growth Potential Index -TOPIX Ex-Fin

Absolute perform ance
Nom ura Japan Equity
Grow th Potential Index
Latest 5 years
Return (annualized, %)Risk (annualized, %)Return/risk
Entire period (2001/9–)
Return (annualized, %)Risk (annualized, %)Return/risk

TOPIX

Relative perform ance
TOPIX Ex-Fin

vs TOPIX

vs TOPIX Ex-Fin

13.5
14.5
0.93

6.0
15.5
0.39

6.9
14.7
0.47

7.5
6.6
1.13

6.6
5.6
1.19

9.9
16.0
0.62

5.0
17.5
0.29

5.8
16.6
0.35

4.8
6.0
0.81

4.1
5.5
0.74

Note: Shows data for September 2001 through December 2018. Based on monthly return including dividends. Transaction costs are not included. Analysis is based on past
performance and does not guarantee future performance.
Source: Nomura

Factor analysis of excess returns versus TOPIX
Figure 5 shows a breakdown of the excess returns on the Nomura Japan Equity Growth
Potential Index versus the TOPIX by factor.

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29 January 2019

Fig. 5: Factor analysis of excess returns versus TOPIX

100%

100%

100%

80%

80%

80%
Asset selection

60%

60%

60%

40%

40%

40%

20%

20%

0%

0%

-20%

-20%

-40%

-40%

Factors

Contribution(net)

Sectors(rhs: gross)

20%
0%

Risk indices(lhs: gross)

‐20%
‐40%

Components making largest positive contributions

Asset selection

62.5%

―

Sectors

29.4%

Consumer goods/services sector (high weighting), financial sector (low weighting)

Risk indices8.1%

Size (high weighting of small and mid-sized stocks), financial leverage (low)Note: Shows data for September 2001 through December 2018. The bar in the middle shows the net contributions made by asset selection, risk indices, and sectors, to theexcess returns generated by the Nomura Japan Equity Growth Potential Index relative to the TOPIX, based on MSCI's Barra Japan equity model (JPE4). The bars to the left andright indicate the gross contributions of risk indices and sectors, respectively.
Source: Nomura

As Figure 5 shows, asset selection made the greatest positive contribution to excess
returns on the Nomura Japan Equity Growth Potential Index versus the TOPIX. This
indicates that components not included under sectors or risk indices generated excess
returns. As it appears that investors' efforts to encourage companies to achieve growth
and the steps taken by companies in response to this encouragement, on which the
Nomura Japan Equity Growth Potential Index focuses, cannot be fully explained in termsof existing risk factors or sector factors, these efforts made by investors and companies
can therefore be regarded as having made a positive contribution to the excess returns
on the index, as asset selection factors.
Sector factors made a contribution of just under 30% to the index's excess returns. The
high weighting of the consumer goods/services sector and the exclusion of financial
sectors, as specified in the index’s stock selection criteria, made particularly large
positive contributions.
Risk index factors made a net contribution of only around 8% because positive
contributions were largely offset by negative contributions. Size factors 5 made aparticularly large positive contribution, with the relatively high weighting of small and midsized stocks making a positive contribution to the excess returns on the Nomura Japan
Equity Growth Potential Index. Low financial leverage made the next largest contribution.
It could thus be argued that the exclusion of ultra-large-cap stocks from the index andthe fact that the debt ratio is taken into account when assessing companies' potential for

5

Among Barra risk index factors, we use “size” and “non-linear size” together as size factors.

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29 January 2019

growth, as specified in the stock selection criteria, had a positive effect on index
performance.
Index performance by market phase
We will now consider what kind of market phases the Nomura Japan Equity Growth
Potential Index is likely to perform well in, and what kind of market phases it is likely toperform poorly in.
Figure 6 shows annualized average monthly excess returns (including dividends) on the
Nomura Japan Equity Growth Potential Index versus the TOPIX in the months in which
the TOPIX (including dividends) rose, saw little change, and fell.

Fig. 6: Average excess return versus TOPIX, by phase (annualized)

Months in which TOPIX rose (98)-1.2Months of little change (43)4.7Months in which TOPIX fell (67)

13.8

-4

0

4

8

12

16
(%)

Note: Shows data for September 2001 through December 2018. Figure shows annualized average monthly excess returns(including dividends) on the Nomura Japan Equity Growth Potential Index versus the TOPIX in the months in which the
TOPIX (including dividends) rose by 1% or more (months in which TOPIX rose), rose or fell by less than 1% (months oflittle change), and fell by 1% or more (months in which TOPIX fell). Numbers on the left of the chart in parentheses indicate
the number of months in each category.
Source: Nomura

As Figure 6 shows, the Nomura Japan Equity Growth Potential Index saw a particularly
strong relative performance in months when the market fell. It also put in a strong relative
performance in months when the market saw little change, with no clear decline, but
tended to underperform slightly in months when the market was rising. If we look at thedata in more detail, we see that, for example, the Nomura Japan Equity Growth Potential
Index basically outperformed the market in the period when the market was falling fromthe second half of 2007 through early 2009, initially on concerns about sub-prime loans
in the US and later in response to the collapse of Lehman Brothers. A more recent
example of a period when the Nomura Japan Equity Growth Potential Index
outperformed the market is the period from early 2016, when the market fell on fears of
economic slowdown in China, through to the Brexit vote in June 2016. After this,however, the market recovered and the number of months in which the index
underperformed the TOPIX increased further during the Trump rally. The index also
underperformed the TOPIX in the period from end-2012 to the formation of the second
Abe administration, and at the time when Abenomics was launched.
We think the rules used to select stocks for the Nomura Japan Equity Growth Potential
Index have an impact on its performance characteristics.
Investors tend to steer clear of stocks with weak financial indicators when the market isfalling on concerns about creditworthiness, as was seen at the time of concerns about
subprime loans in the US. The stocks selected for the Nomura Japan Equity Growth
Potential Index are likely to attract a relatively large degree of attention in the markets
because these companies tend to have substantial funds available for use and to behighly financially stable. On the other hand, stocks with a high degree of financial risk arelikely to rebound and outperform the index in phases when the market is rising after acredit crisis.

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5. Characteristics of stocks selected forthe index
Breakdown of constituent stocks by size and sector
Figure 7 shows the distribution of constituent stocks of the Nomura Japan Equity Growth
Potential Index, as of the beginning of September 2018, when the most recent periodic
reconstitution was carried out, by both size and sector. This therefore only shows theindex's composition at one recent point in time, but the characteristics revealed in thefactor analysis of historical excess returns versus the TOPIX set out in Chapter 4 can beseen here too.
Fig. 7: Composition of Nomura Japan Equity Growth Potential Index by size and sector

Small
(27)
9.9%

Commercial &wholesale
Construction & trade
4.3%
materials

Large
(3)
12.4%

Retail trade
2.6%

Electric
appliances &precision
instruments
16.3%

5.2%

Automobiles &transportationequipment
6.4%

Other
1.7%

Foods
15.2%

Raw materials& chemicals
10.0%
Pharmaceutical
12.2%

Mid-sized
(59)
77.7%

Machinery
12.3%

IT & services,others
13.8%

Active weighting of each sector versus TOPIX
Foods (10)Energy resources (0)Construction & materials (7)Raw materials & chemicals (7)Pharmaceutical (7)Automobiles & transportation equipment (6)Steel & nonferrous metals (2)Machinery (14)Electric appliances & precision instruments (13)
IT & services, others (13)Electric power & gas (0)Transportation & logistics (1)Commercial & wholesale trade (4)Retail trade (5)Banks (0)Financials (ex banks) (0)Real estate (0)
-8%

-4%

0%

4%

8%

12%

Note: The left- and right-hand pie charts show the weighting of stocks in the Nomura Japan Equity Growth Potential Index by size and by sector, based on TOPIX categories forsize and TOPIX 17 sectors. The bar chart underneath the pie charts shows the difference between sector weightings in the Nomura Japan Equity Growth Potential Index and the
TOPIX. Numbers to the right of the sector names are the number of stocks from each sector in the Nomura Japan Equity Growth Potential Index. All data are as of the beginningof September 2018.
Source: Nomura

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Large-cap stocks (TOPIX 100 stocks) have a low weighting in the index, but the index
contains a large number of mid-sized stocks (TOPIX Mid400 stocks). The index’s stock
selection rules stipulate that all stocks excluding ultra-large-cap stocks (the top 50 stocks
in the First Section of the Tokyo Stock Exchange in terms of market cap) may be
included in the index, but in practice the stocks that are selected for the index tend toshow a greater bias towards mid-sized stocks than the stock selection rules suggest.
This bias towards mid-sized stocks, one of the "size factors" introduced in Chapter 4, isin our view likely to make a positive contribution to excess returns on the Nomura Japan
Equity Growth Potential Index versus the TOPIX.
The weighting of the various sectors in the index is more evenly balanced, as the righthand pie chart in Figure 7 shows, but, as the bar chart at the bottom shows, thedistribution of sectors within the index differs from that in the TOPIX. The index has
higher weightings than the TOPIX in the foods, pharmaceutical, and machinery sectors,
and of these three we regard the higher weightings of the foods and pharmaceuticalsectors, which correspond to the consumer goods/services sector in the Barra model, assector factors that are likely to make a positive contribution to excess returns on theindex. The Nomura Japan Equity Growth Potential Index is underweight in the financials
sector versus the TOPIX because financial stocks are explicitly excluded in the index's
stock selection criteria. However, we think this too makes a positive contribution to theexcess returns on the index versus the TOPIX.

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6. Conclusion
The Nomura Japan Equity Growth Potential Index uses the stock selection criteria set
out in Chapter 3 to select stocks that look likely to generate growth. Potential for growthis assessed on the basis of "room for growth" and "abundance of capital", which we see
as essential preconditions for growth, but simply meeting these preconditions does notguarantee future growth. The key lies in whether or not companies modify their behavior
in a way that enables them to leverage their potential and thus actually achieve growth.
Now that the concept of the responsibilities of stewardship is becoming widely
understood, institutional investors can be expected to encourage companies with thepotential for growth to take steps aimed at generating this growth, via methods that
include engagement, the exercise of their voting rights, and shareholder proposals. For
companies that are able to respond to this encouragement from institutional investors,
this might help them to tap into their growth potential and achieve actual growth, rather
than leaving their potential untapped. Indeed, the Nomura Japan Equity Growth Potential
Index started to outperform the market substantially in 2013, and this is around the sametime that improving Japanese companies' productivity started to be a key focus ofgovernment policy and the role of institutional investors in encouraging corporate growthbegan to attract attention.
Many institutional investors and companies have already indicated that they agree to therecommendations made in Japan's Stewardship Code and Corporate Governance Codethat companies and investors should work together to achieve continuous corporate
growth, and we expect this situation to continue to develop. We hope that the Nomura
Japan Equity Growth Potential Index will help investors to invest in companies that arelikely to achieve growth on the back of this relationship between investors andcompanies.

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Appendix A-1
Analyst Certification
We, Masako Yamamoto and Yasuhiro Shimizu, hereby certify (1) that the views expressed in this Research report accuratelyreflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part ofour compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in thisResearch report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Important Disclosures
The lists of issuers that are affiliates or subsidiaries of Nomura Holdings Inc., the parent company of Nomura Securities Co., Ltd., issuers thathave officers who concurrently serve as officers of Nomura Securities Co., Ltd., issuers in which the Nomura Group holds 1% or more of any
class of common equity securities and issuers for which Nomura Securities Co., Ltd. has lead managed a public offering of equity or equity
linked securities in the past 12 months are available at https://www.nomuraholdings.com/report/. Please contact the Research Production
Operation Dept. of Nomura Securities Co., Ltd. for additional information.

Online availability of research and conflict-of-interest disclosures
Nomura Group research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne.
Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested
from Nomura Securities International, Inc., or Instinet, LLC on 1-877-865-5752. If you have any difficulties with the website, pleaseemail grpsupport@nomura.com for help.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are
not registered/qualified as research analysts under FINRA rules, may not be associated persons of NSI or ILLC, and may not be subject to
FINRA Rule 2241 restrictions on communications with covered companies, public appearances, and trading securities held by a researchanalyst account.
Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) areregistered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, andNIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.

Distribution of ratings (Nomura Group)
The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
51% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with thisrating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA)
with this rating were supplied material services** by the Nomura Group.
43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies withthis rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group
6% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 15% of companies withthis rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group.
As at 31 December 2018.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation
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The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
55% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
4% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

Definition of Nomura Group's equity research rating system and sectors
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the statedtarget price, defined as (target price - current price)/current price.

STOCKSA rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target

14Nomura | Nomura Japan Equity Growth Potential Index

29 January 2019price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia exJapan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCIEmerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates thatthe analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Target Price
A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's
estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, andby other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

Disclaimers
This publication contains material that has been prepared by the Nomura Group entity identified on page 1 and, if applicable, with thecontributions of one or more Nomura Group entities whose employees and their respective affiliations are specified on page 1 or identified
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Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New
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KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the
Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities andInvestment Commission ('ASIC') and holder of an Australian financial services licence number 246412; PT Nomura Sekuritas Indonesia(‘PTNSI’); Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory andSecurities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie
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Registration No. for Stock Broking activities : BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034;
SEBI Registration No. for Merchant Banking : INM000011419; SEBI Registration No. for Research: INH000001014 and NIplc, Madrid Branch(‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by
Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under an agreement between CNS
and NSL. ‘NSFSPL’ next to an employee’s name on the front page of a research report indicates that the individual is employed by Nomura
Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. The "BDO-NS"(which stands for "BDO Nomura Securities, Inc.") placed next to an analyst’s name on the front page of a research report indicates that theanalyst is employed by BDO Unibank Inc. ("BDO Unibank") who has been seconded to BDO-NS, to provide research assistance services to
NSL under an agreement between BDO Unibank, NSL and BDO-NS. BDO-NS is a Philippines securities dealer, which is a joint venture
between BDO Unibank and the Nomura Group.
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This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s.
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Nomura | Nomura Japan Equity Growth Potential Index

29 January 2019any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, itsaffiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties oforiginality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting anyof the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information
have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.
The intellectual property rights and any other rights, in Russell/Nomura Japan Equity Index belong to Nomura Securities Co., Ltd. ("Nomura")and Frank Russell Company ("Russell"). Nomura and Russell do not guarantee accuracy, completeness, reliability, usefulness, marketability,
merchantability or fitness of the Index, and do not account for business activities or services that any index user and/or its affiliates undertakeswith the use of the Index.
Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not beviewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a
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Nomura | Nomura Japan Equity Growth Potential Index

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NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II)REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF THE NOMURA GROUP. If this document has been
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------

Disclaimers required in Japan
Credit ratings in the text that are marked with an asterisk (*) are issued by a rating agency not registered under Japan’s Financial Instruments
and Exchange Act (“Unregistered Ratings”). For details on Unregistered Ratings, please contact the Research Product Management Dept. of
Nomura Securities Co., Ltd.
Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example,
transactions involving Japanese equities are subject to a sales commission (all figures on a tax-inclusive basis) of up to 1.404% of thetransaction amount or a commission of ¥2,808 for transactions of ¥200,000 or less, while transactions involving investment trusts are subject tovarious fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to each investment trust). In
addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read
the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses.
-----Transactions involving Japanese equities (including Japanese REITs, Japanese ETFs, and Japanese ETNs) are subject to a sales commissionof up to 1.404% of the transaction amount (or a commission of ¥2,808 for transactions of ¥200,000 or less). When Japanese equities arepurchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However,Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Japanese equities carry the risk of losses
owing to price fluctuations. Japanese REITs carry the risk of losses owing to fluctuations in price and/or earnings of underlying real estate.
Japanese ETFs carry the risk of losses owing to fluctuations in the underlying indexes or other benchmarks.
Transactions involving foreign equities are subject to a domestic sales commission of up to 1.026% of the transaction amount (which equals the
local transaction amount plus local fees and taxes in the case of a purchase or the local transaction amount minus local fees and taxes in thecase of a sale) (for transaction amounts of ¥750,000 and below, maximum domestic sales commission is ¥7,668). Local fees and taxes inforeign financial instruments markets vary by country/territory. When foreign equities are purchased via OTC transactions (including offerings),
only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC
transactions, as agreed with the customer. Foreign equities carry the risk of losses owing to factors such as price fluctuations and foreignexchange rate fluctuations.
Margin transactions are subject to a sales commission of up to 1.404% of the transaction amount (or a commission of ¥2,808 for transactions of¥200,000 or less), as well as management fees and rights handling fees. In addition, long margin transactions are subject to interest on thepurchase amount, while short margin transactions are subject to fees for the lending of the shares borrowed. A margin equal to at least 30% of
the transaction amount (at least 33% for online transactions) and at least ¥300,000 is required. With margin transactions, an amount up toroughly 3.3x the margin (roughly 3x for online transactions) may be traded. Margin transactions therefore carry the risk of losses in excess of themargin owing to share price fluctuations. For details, please thoroughly read the written materials provided, such as listed securities documents
or documents delivered before making a contract.
Transactions involving convertible bonds are subject to a sales commission of up to 1.08% of the transaction amount (or a commission of¥4,320 if this would be less than ¥4,320). When convertible bonds are purchased via OTC transactions (including offerings), only the purchaseprice shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as
agreed with the customer. Convertible bonds carry the risk of losses owing to factors such as interest rate fluctuations and price fluctuations in
the underlying stock. In addition, convertible bonds denominated in foreign currencies also carry the risk of losses owing to factors such as
foreign exchange rate fluctuations.
When bonds are purchased via public offerings, secondary distributions, or other OTC transactions with Nomura Securities, only the purchaseprice shall be paid, with no sales commission charged. Bonds carry the risk of losses, as prices fluctuate in line with changes in market interest
rates. Bond prices may also fall below the invested principal as a result of such factors as changes in the management and financial
circumstances of the issuer, or changes in third-party valuations of the bond in question. In addition, foreign currency-denominated bonds also
carry the risk of losses owing to factors such as foreign exchange rate fluctuations.
When Japanese government bonds (JGBs) for individual investors are purchased via public offerings, only the purchase price shall be paid, withno sales commission charged. As a rule, JGBs for individual investors may not be sold in the first 12 months after issuance. When JGBs forindividual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value of the bondplus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be
used, (2) for 5-year and 3-year fixed rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used.
When inflation-indexed JGBs are purchased via public offerings, secondary distributions (uridashi deals), or other OTC transactions with
Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Inflation-indexed JGBs carry the risk of losses, as
prices fluctuate in line with changes in market interest rates and fluctuations in the nationwide consumer price index.The notional principal of
inflation-indexed JGBs changes in line with the rate of change in nationwide CPI inflation from the time of its issuance. The amount of the
coupon payment is calculated by multiplying the coupon rate by the notional principal at the time of payment. The maturity value is the amountof the notional principal when the issue becomes due. For JI17 and subsequent issues, the maturity value shall not undercut the face amount.
Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.4% of the transaction
amount. Also, a direct cost that may be incurred when selling investment trusts is a fee of up to 2.0% of the unit price at the time of redemption.
Indirect costs that may be incurred during the course of holding investment trusts include, for domestic investment trusts, an asset managementfee (trust fee) of up to 5.4% (annualized basis) of the net assets in trust, as well as fees based on investment performance. Other indirect costs
may also be incurred. For foreign investment trusts, indirect fees may be incurred during the course of holding such as investment company
compensation.
Investment trusts invest mainly in securities such as Japanese and foreign equities and bonds, whose prices fluctuate. Investment trust unit
prices fluctuate owing to price fluctuations in the underlying assets and to foreign exchange rate fluctuations. As such, investment trusts carry
the risk of losses. Fees and risks vary by investment trust. Maximum applicable fees are subject to change; please thoroughly read the writtenmaterials provided, such as prospectuses or documents delivered before making a contract.
In interest rate swap transactions and USD/JPY basis swap transactions (“interest rate swap transactions, etc.”), only the agreed transaction
payments shall be made on the settlement dates. Some interest rate swap transactions, etc. may require pledging of margin collateral. In someof these cases, transaction payments may exceed the amount of collateral. There shall be no advance notification of required collateral value or
collateral ratios as they vary depending on the transaction. Interest rate swap transactions, etc. carry the risk of losses owing to fluctuations inmarket prices in the interest rate, currency and other markets, as well as reference indices. Losses incurred as such may exceed the value ofmargin collateral, in which case margin calls may be triggered. In the event that both parties agree to enter a replacement (or termination)transaction, the interest rates received (paid) under the new arrangement may differ from those in the original arrangement, even if terms other17Nomura | Nomura Japan Equity Growth Potential Index

29 January 2019

than the interest rates are identical to those in the original transaction. Risks vary by transaction. Please thoroughly read the written materials
provided, such as documents delivered before making a contract and disclosure statements.
In OTC transactions of credit default swaps (CDS), no sales commission will be charged. When entering into CDS transactions, the protection
buyer will be required to pledge or entrust an agreed amount of margin collateral. In some of these cases, the transaction payments may exceed
the amount of margin collateral. There shall be no advance notification of required collateral value or collateral ratios as they vary depending on
the financial position of the protection buyer. CDS transactions carry the risk of losses owing to changes in the credit position of some or all of
the referenced entities, and/or fluctuations of the interest rate market. The amount the protection buyer receives in the event that the CDS is
triggered by a credit event may undercut the total amount of premiums that he/she has paid in the course of the transaction. Similarly, theamount the protection seller pays in the event of a credit event may exceed the total amount of premiums that he/she has received in thetransaction. All other conditions being equal, the amount of premiums that the protection buyer pays and that received by the protection seller
shall differ. In principle, CDS transactions will be limited to financial instruments business operators and qualified institutional investors.
No account fee will be charged for marketable securities or monies deposited. Transfers of equities to another securities company via the Japan
Securities Depository Center are subject to a transfer fee of up to ¥10,800 per issue transferred depending on volume.

Nomura Securities Co., Ltd.
Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142)
Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association ofJapan; and Type II Financial Instruments Firms Association.
The Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but
not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese Walls andemployee training.
Additional information regarding the methodologies or models used in the production of any investment recommendations contained
within this document is available upon request by contacting the Research Analysts listed on the front page. Disclosures information
is available upon request and disclosure information is available at the Nomura Disclosure web
page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx
Copyright © 2019 Nomura Securities Co., Ltd. All rights reserved.

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