Japan Governance Code Could Unlock $840B
A revision to Japan's corporate governance code could unlock an estimated $840 billion in cash held by listed companies. The change is expected to pressure firms to unwind cross-shareholdings and use excess capital for measures like stock buybacks. This could provide a significant boost to the Japanese stock market and is a key signal for global investment outlooks.
- The push for reform is part of a broader initiative under "Abenomics," the economic policies advocated by former Prime Minister Shinzo Abe, to boost profitability and growth by changing corporate culture. This initiative also includes Japan's Stewardship Code, first introduced in 2014, which outlines principles for responsible institutional investors to promote sustainable corporate value. - Japan's Corporate Governance Code operates on a "comply or explain" basis, meaning it is not legally binding. Companies listed on the Tokyo Stock Exchange (TSE) must either adhere to the code's principles or publicly explain their reasons for not doing so in their corporate governance reports. - A key target of the reforms is the reduction of "cross-shareholdings," where companies hold shares in their business partners for reasons other than pure investment, such as strengthening relationships. The code requires boards to annually assess the economic rationale for these holdings and disclose their policies on reducing them. - Historically, the boards of Japanese companies were often composed entirely of internal members who had risen through the ranks in a lifetime employment system. The governance code has pushed for greater board independence, with nearly all companies on the TSE's top-tier Prime Market now having at least one-third of their board seats held by independent outside directors. - The Tokyo Stock Exchange has been a key driver of these reforms, restructuring its market segments in April 2022 into Prime, Standard, and Growth markets to offer a more attractive market for diverse investors. As of March 2023, the TSE has requested all Prime and Standard listed companies to implement management practices that are conscious of their cost of capital and stock price. - The reforms are intended to address the issue of Japanese companies hoarding cash, a practice that became common after decades of economic stagnation. By encouraging the use of this excess capital for things like stock buybacks and R&D investment, the reforms aim to improve companies' return on equity (ROE), which has traditionally been low compared to other developed markets. - The Financial Services Agency (FSA) and the Ministry of Economy, Trade and Industry (METI) are considering the next phase of corporate governance development to further strengthen the earning power of Japanese companies. The FSA plans to review the code in mid-2026.
