Japan's ongoing corporate governance reforms have reached a critical inflection point, with tangible improvements in shareholder returns and board independence triggering a significant increase in foreign investment.
The Tokyo Stock Exchange's revised Corporate Governance Code, implemented in April 2025, has mandated stricter requirements for independent directors and capital efficiency metrics. Companies have responded with record share buybacks and dividend increases.
Market Response
Foreign investors have allocated approximately $42 billion to Japanese equities year-to-date, the strongest inflow since 2013. Activist investors have also increased their presence, with 38 new campaigns launched in the first quarter of 2025.
The heightened focus on return on equity (ROE) has particularly benefited companies in the industrial and financial sectors, where structural inefficiencies had previously limited shareholder returns.
Strategic Outlook
We expect this reform momentum to continue, with further policy measures aimed at unwinding cross-shareholdings and encouraging business portfolio optimization. Companies demonstrating proactive governance improvements are likely to command valuation premiums.
For investors, identifying businesses still in the early stages of governance reform but with substantial underlying asset value presents a compelling opportunity in the Japanese market.