Richard Aston, Portfolio Manager of the Chikara Japan Income & Growth Fund and the CC Japan Income & Growth Trust PLC, notes the increasing impact of corporate governance in Japan.

In recent years, the Japan Exchange Group (JPX Group) has been rolling out an ambitious corporate governance reform campaign.

It has introduced a series of guidelines aimed at encouraging a stronger focus on shareholders among listed companies. With firms falling short now being publicly called out, ignoring the recommendations has become a very visible risk.

It’s a tough stance, no doubt.

But by working to make Japan’s stock market more efficient and better functioning overall, the Tokyo Stock Exchange’s (TSE) approach also promises real advantages to investors.

With the group’s data showing stocks unwilling to enhance value are rethinking whether they want to be listed at all, current data suggests that the reforms are resulting in positive outcomes.

Pushing for Change

Corporate governance reform has been on the agenda in Japan since the dawn of Abenomics in 2012. It’s really hit its stride in the last couple of years thanks to the JPX Group.

First came its reorganisation of the TSE into three new divisions – Prime, Standard, and Growth – to boost transparency and better align listed companies with investor expectations.

Then came its request for listed business to detail plans for increasing corporate value – including improving cost of capital, governance standards and shareholder engagement.

Then, and perhaps most notably, came its adoption of a regularly updated, publicly displayed list of all of the companies failing to keep pace with its appeals

The over-arching goal here is clear.

Publicly naming companies failing to meet Japan’s new corporate governance standards forces them either to up their game or reassess whether they want to be listed at all. The long-term effect of clearing away laggards is to make Japan’s stock market more attractive to both domestic and foreign investors on the whole.

Is it working? We certainly believe so, with a number of data points suggesting positive change is underway.

May figures from the JPX Group show 92% of Prime Market stocks and 51% of Standard Market stocks have now disclosed plans to improve cost of capital.

Just as importantly, its data also shows a considerable jump in the number of companies de-listing from the TSE: from 61 in 2023 to 94 in 2024. When asked why, the most common reasons were “becoming a wholly-owned subsidiary” and “management buy-outs”.

We believe the data paints a clear picture.

Given corporate governance shortcomings are now being aired in public, Japan’s listed companies are asking themselves if the benefits of being listed outweigh the cost of giving more to shareholders.

If the answer is “no, they do not”, management teams are shifting their operations to the private sector where they can operate as they wish. You can look to the proposed $42 billion buyout of Toyota Industries by Toyota Group companies and $16.4 billion buyout of NTT Data by its parent NTT for recent examples of the trend in action.

If the decision is “yes, they do”, management teams are – on the whole – putting in a concerted effort to deliver more value. And this is evident in the shareholder payouts we’re currently seeing across the Japanese market.

Companies are expected to pay a total of  ¥18.3trn ($127bn) in dividends in fiscal 2024 – topping records for the fourth straight year. Share buybacks in April, meanwhile, nearly tripled the previous year, putting the total so far in 2025 at ¥6.9trn – more than double the figure at the same point in 2024.

Monthly Share Buybacks Announced by TOPIX Constituents

Source: QUICK; compiled by Daiwa
Note: Cumulative amount of share buybacks announced from April each year

Looking Forward

Long may the trend continue.

As companies unwilling to change continue to delist and those who want to remain listed continue to work harder to deliver as much value as possible to shareholders, the Japanese stock market as a whole becomes an increasingly attractive proposition to investors.

Japan saw foreign inflows into its equities hit a record high in April, spurred on in part by a global move away from US equities. We expect investment to continue rising as the nation’s management teams continue to demonstrate their commitment to corporate governance reform.

 

By Richard Aston, Portfolio Manager of the Chikara Japan Income & Growth Fund and the CC Japan Income & Growth Trust PLC.