Japan is seeking higher returns for investors - here's its strategy.

• Tokyo's stock exchange will reveal its first monthly list of companies that have disclosed plans to improve their capital management and share prices, which will benefit investors.
• Fumio Kishida's plans for Japan Inc aim to make it an appealing investment destination for both foreigners and locals, thereby creating jobs and increasing retirement savings.
• Japan's companies are required to have more diversity and independence through corporate governance reforms.

This year, Japan is intensifying its efforts to improve the efficiency of its listed companies in allocating capital and enhancing shareholder returns.

Tokyo's stock exchange will release its first monthly list of public companies with capital management plans on Monday, aimed at improving returns for investors.

The Japanese government and TSE are working on plans to enhance corporate board independence and boost female representation.

The Japanese government, including the Tokyo stock exchange, is actively promoting better corporate governance at present, according to Toru Yoshikawa, a business professor at Waseda University in Tokyo.

The Tokyo Stock Exchange is continuing its corporate governance reforms, which began in March 2020, by requiring listed companies with a price-to-book ratio below one to either comply or explain their capital usage.

Fumio Kishida's broader pledge to transform Japan Inc into an attractive investment proposition for foreigners and Japanese investors includes just one part.

Japan has revamped its Nippon Individual Savings Account (NISA) to exempt all investments under this program from taxes for the investor's entire life, starting from this month.

Japan's government is responsible for ensuring consistent profits from Japanese businesses.

The measures implemented have consequences for Japan's broader economic goals, including firms' wage-setting practices and the attempt to revive the world's third-largest economy, which has been in deflation for most of the past three decades.

To ensure that its aging population has more than just their regular pensions to live on in retirement, the country is focused on its listed companies providing attractive shareholder returns.

Yoshikawa stated that the issue of insufficient retirement income for many people in Japan is a critical matter that needs to be addressed in the future. Additionally, the government aims to attract more foreign investment to create higher skilled job opportunities.

Japanese stocks have experienced a surge in interest due to the possibility of significant change, with the benchmark reaching its highest point in over three decades. Foreign investors have been at the forefront of this trend, following in the footsteps of Warren Buffet and his optimistic predictions about Japanese equities.

Corporate governance push

The disclosures on Monday will be based on data from December, and will be released on a monthly basis.

The Tokyo Stock Exchange reported that only 31% of 1,235 "prime" listings and 14% of 887 "standard" listings have responded to its request for information on discussions and specific measures and timelines for improving their capital management.

In Japan, there is a peer pressure factor that encourages companies to improve their corporate governance, as stated by Yunosuke Ikeda, Nomura's chief equity strategist, in June. However, delisting, punishment, or enforcement is unlikely to occur.

The world’s largest carmaker is one example.

In late November, it was announced that, along with two other affiliated companies, it would decrease its investment in car parts maker to finance more investment in electric vehicles. Additionally, Toyota announced in late July that it would reduce its stake in telecommunications operator.

Goldman Sachs Japan equity strategists predict that the continued pressure from the Tokyo Stock Exchange (TSE) on corporations to comply with its requests will result in an increase in corporate governance-related activities among listed Japanese companies in 2024.

They stated that investors consider company announcements about the unwinding of cross-shareholdings as a significant indicator of corporate governance improvement, and since share prices tend to react strongly, this theme deserves continued attention in 2024.

Board changes

To increase diversity and independence on their boards and improve responsiveness to shareholders, there are various strategies being implemented in Japan Inc.

By 2025, Japan's government plans to mandate that the largest listed companies have at least one woman on their boards as part of the listing regulations.

Japan aims to increase female participation in the economy by having women constitute at least 30% of the directors at major companies, according to draft plans released by Japan’s Gender Equality Bureau in June.

The Financial Services Agency in Japan's 2021 revision of the Corporate Governance Code mandated that at least one-third of the board of listed companies must be independent directors from outside their respective companies.

According to Bank of America Securities' Japan equity strategists, the recent wave of sweeping capital reshuffling is not a mere coincidence.

Companies are facing stronger disciplinary measures, and there are signs that the meaning of being listed is shifting for them.