Reforms bear fruit as corporate dealmaking hits record high
Key takeaways
- Japanese corporate reforms are fostering investor engagement, encouraging better risk taking and improving capital efficiency and profitability.
- There has been a record number of corporate actions in Japan this year, a likely indicator that the reforms are working.
- There is more work to be done, for example around better engagement between corporates and investors, to drive further change.
The roots of recent corporate reform in Japan can be traced back to the establishment of the Stewardship Code1 in 2014 and the Corporate Governance Code in 2015.2 Since then, the Stewardship Code itself has undergone three revisions, moving from initially addressing shareholder value, to including other stakeholders, and then introducing the concept of collective engagement.3
The aims of these reforms are, nevertheless, very firm: to address Japan’s inefficient corporate balance sheets and persistently low profitability. Indeed, in March 2023 the Tokyo Stock Exchange (TSE) explicitly urged listed companies to take “Action to Implement Management that is Conscious of Cost of Capital and Stock Price”.4 The message is unambiguous. Speaking at BofA Global Research 2025 Japan Conference in Tokyo in September, Hiromichi Mizuno, former CIO of Japan’s Government Pension Investment Fund and founder & CEO of Good Steward Partners, emphasised that the statement of the Financial Services Agency of Japan is very clear. “Their primary aim in implementing these two codes is to improve the profitability of Japanese companies,” he said.
Visible Results
There is clear willingness to improve. Some 91% of companies listed on the Prime section on the Tokyo Stock Exchange have now disclosed their plans to improve their capital efficiency and share price5 along with 48% of companies listed on the Standard section. But it will be investors and the market that will be the ultimate judge of progress. So far, feedback from global investors has been encouraging.
“It has been 2.5 years since TSE made a request for Prime and substantial listed companies to be conscious of cost of capital and share price, and the results are visible and promising”
Hiromi Yamaji, Group CEO of Japan Exchange Group, stated at the same BofA Global Research conference in September.
Corporate reforms have been designed to address other key problems, notably the protection of minority shareholders. There has been much criticism of multi-generational cross shareholdings between large firms6 and there is intense pressure on these corporations to unwind these arrangements. In addition, companies doing any transaction with other related companies must now establish a special committee to determine the fairness of the deal.7
Another key target of the reforms is the start-up culture in Japan. “We plan to strengthen the Growth market segment by requiring a higher market cap to continue listing. This will encourage start-ups in Japan to aim for stronger growth,” Yamaji explained. There is a view in Japan that start-up companies have historically found it difficult to scale up as the market is dominated by value investors, making it challenging for new companies to keep growing.
The market has nevertheless been successful in seeding new ideas within existing firms. “In Japan a lot of innovation is encouraged and fostered in the big corporations,” said Mizuno.
“Japanese businesses have survived for the last 100 years, and it is impossible to do that without being innovative.”
Mizuno emphasised that growth must be encouraged across the spectrum. “Start-ups are important, but supporting other big businesses to manage long-term innovation, to scale up, is probably more important,” he added. “This is where boards should encourage strategic risk taking rather than just saying look at the spreadsheet.”
The root cause of many of the problems that the reforms are tackling is the need for better business risk-taking in traditionally risk-conscious Japanese corporates. This means reviewing board composition and improving engagement with the investor community.
“Corporate governance reform is not just about the organisational form of companies. It is also about management taking appropriate business risks and companies achieving sustainable strong growth,”
said Yamaji. They must be encouraged to do so, which may in turn necessitate a revision of both board composition and remuneration. Progress has been made in the latter. Indeed, 2025 is the first year in which stock-based remuneration incentives are greater than fixed pay for Japanese CEOs, up from 14% in 2014/2015 (58% fixed pay) to 33% today versus 32% fixed pay.8 It is hoped that this will stimulate risk taking at the top.
“A lot of board members feel like they have to manage executives rather than encourage them to take risk to grow the business,” Mizuno explained. “The board should encourage them to be more strategic and maximize and optimize their creativity, which I really don't think Japanese corporate governance is now promoting,”
He pointed out that some reform initiatives can actually be counter-productive. “Corporate governance is there to promote sustainable growth in the business and to guide executives to take due risks for that,” Mizuno added. “The composition of the board will not and should not affect the bottom line of the business over the short term.”
Mizuno added that having female board members brings more diversified perspectives to boardroom discussion and addresses different kinds of stakeholders. However, the small pool of female board candidates in Japan means that they often have multiple roles across different companies. “This is not a performance concern; expanding the talent pipeline is what truly matters,” he adds.
Fruitful Engagement
Better engagement between investors and Japanese corporates will be crucial in catalysing strategic change. As investor interest has grown, it has become clear that there is more to be done around, for example, which financial indicators global investors are focused on and why. This is a particular problem among standard listed companies as they usually have a smaller market cap and have less opportunity to talk to global investors. But as foreign investors find more opportunities in the standard market, some of these companies have shown a willingness to engage.
There is growing optimism around the progress of corporate reform in Japan. “It is very clear that the change is happening,” says Yamaji. “There is an increasing number of better disclosures and an increasing number of better engagements with investors. But the biggest positive change is the significant increase in corporate actions in Japan.” 4,700 M&A transactions took place in 2024, a record high driven largely by accelerating corporate reforms. But there is still more than can be done. “We are not satisfied with the current situation,” Yamaji emphasizes. “Reform is still at the early stage. We can say with confidence that we will keep making changes and improve our own initiatives.”
1 Financial Services Agency: “Finalisation of Japan’s Stewardship Code” April 2014
2 JPX: “Japan’s Corporate Governance Code” June 2015
3 Financial Services Agency: R”evision of the Stewardship Code” June 2025
4 JPX: “Action to implement management that is conscious of cost of capital and stock price” March 2023
5 Source: JPX January 2025
6 Nikkei Asia: ”Japan doubles down on cross-shareholding disclosure amid reforms” July 2025
7 The Japan Times: “BOJ seeks to remove stocks overhang with slow sell-down of ETFs” September 2025
8 Source: JPX
