"Japan's Corporate Governance Reform Was Government-Led... Needs Long-Term Pursuit"

Introduction of Japanese Case at the Value-Up 1st Anniversary Seminar

"Japan's corporate governance reform was not simply an initiative at the level of the Tokyo Stock Exchange (TSE), but rather a government-led initiative involving the entire government."

On the afternoon of May 27, Fuji Naoya, Equity Strategist at Nomura Securities, made this statement at the 'Value-Up 1st Anniversary Seminar' held at the Korea Exchange in Yeouido. Introducing Japan's corporate value enhancement policies, which have served as a role model for Korea's Value-Up program, he explained that Japan has implemented policies to improve corporate governance and enhance capital efficiency for over 10 years. In recent years, as foreign capital has flowed in in earnest, the Nikkei Index reached its highest level in approximately 35 years last year.

First, Fuji identified three factors behind the progress of the TSE-led corporate governance reform: appropriate understanding of the situation, continuous follow-up measures, and support from investors. He said, "The TSE made continuous efforts to evaluate the outcomes and progress of the initiative through active communication with various investors and to incorporate their feedback," referring to the fact that results from on-site investigations were reflected in subsequent projects.

Fuji added, "These TSE initiatives were part of a broader, government-led project to improve corporate productivity," and candidly assessed, "To be honest, not all projects were successful." For example, when the JPX-Nikkei 400 Index was launched in January 2014, it failed to attract significant interest from the market. This index was distinctive in that, unlike simple market capitalization-based indices, it also considered non-financial factors such as profitability, corporate governance, and communication with investors.

He went on to say, "Interestingly, the TSE's most well-known project was launched to overcome the limitations of these previous projects," referring to the TSE's market structure reform (New Market Segments) in April 2022. He continued, "Many investors assessed that these changes were insufficient to drive substantive improvements in Japanese companies, so the TSE introduced management promotion measures that took into account capital costs and share prices for Japanese companies," introducing the so-called 'Tier 3 Request.'

According to the TSE, Japanese companies are now required to participate in three processes: analyzing the current situation, formulating and disclosing business plans based on this analysis, and implementing initiatives. Fuji noted that, as of the end of 2023, nine months after the measures were announced, 40% of companies listed on the Prime Market had participated in disclosures, and that the participation rate later expanded to 85%. However, he pointed out, "In the early stages, the quality of disclosures was low."

In response, the TSE recognized the issue and again categorized companies according to the quality of their disclosures: companies making voluntary efforts to improve management, companies with room for improvement, and companies not disclosing at all. He explained, "Only a small number of companies fully met the TSE's requests, and the quality of disclosures was not sufficient to resolve the problems." He added that the TSE responded further by publishing good and bad (anonymous) examples and highlighting companies willing to communicate with investors. In other words, the TSE did not stop at institutionalization but has continued to evaluate and take follow-up measures.

Active moves by investors have also supported the reforms. Fuji explained, "Traditionally, Japanese companies have held significant cross-shareholdings," but "recently, this proportion has decreased, while the share of foreign investors and pension funds has surged." He noted that, especially among these investors, there are growing calls for improved capital efficiency and shareholder returns, and evaluated, "These changes have led companies to take such initiatives more seriously and have played a key role in the success of the initiatives." Japan's total shareholder return ratio exceeded 60% last year, driven by an increase in share buybacks.

However, Fuji pointed out, "Japanese companies have changed significantly over the past 10 years, but there is still room for improvement." He said, "They still face issues with capital efficiency. Compared to American companies, Japanese companies hold too much cash, and if you look at their business portfolios, business profitability is very low." He emphasized, "Improvements will be made gradually going forward," and "Such reforms need to be pursued over the long term."