Japan’s corporate governance reform has been one of the most significant structural changes in global equity markets over the past decade.
The introduction of the Stewardship Code in 2014 and the Corporate Governance Code in 2015, the Tokyo Stock Exchange’s focus on the cost of capital and share price, the unwinding of cross-shareholdings, growing pressure to address conglomerate structures and non-core assets, and a more active role for shareholders have collectively changed the expectations placed on Japanese companies.
A decade later, some of the most obvious manifestations of that opportunity have become increasingly visible. Japan has experienced record levels of share buybacks. Cross-shareholdings have declined. Companies have become more willing to return surplus capital. Boards have become more independent.
Form to substance
It is relatively straightforward for a company to publish a governance policy, appoint an independent director or announce a share buyback. It is considerably harder to demonstrate that these actions have changed the way a company thinks about capital allocation, portfolio construction and long-term value creation.
Japan’s regulators increasingly recognise this distinction. The Financial Services Agency has explicitly emphasised the need to move “from form to substance” in corporate governance, with greater focus on whether governance arrangements are actually improving corporate value and whether dialogue between companies and investors is genuinely effective.
For investors, this creates a more demanding but potentially more rewarding environment. The question is no longer simply whether a company is responding to the reform agenda, but whether it is doing so in practice rather than in principle, and whether the resulting improvement in corporate value is reflected in its share price.
The challenge now is to identify companies where the initial steps towards better governance and capital allocation are only the beginning of a much broader transformation.
Shifting structures
2026 marks the first revision of Japan’s Corporate Governance Code in five years and represents another important step in the institutionalisation of the reform agenda.
The significance of this revision lies not simply in its individual provisions but in the fact that the principles underpinning Japan’s governance transformation are becoming increasingly embedded in the expectations of the market itself.
Better governance, more effective boards, greater attention to capital allocation and more meaningful engagement between companies and investors are increasingly part of the framework within which Japanese companies are expected to operate. This represents a meaningful change in the context for active ownership.
A decade ago, an investor challenging a company to unwind cross-shareholdings, improve board independence or address excess cash could be seen as pushing against the prevailing corporate culture. Today, these issues are increasingly mainstream, particularly among larger companies that have become more accustomed to the expectations of global investors.
Capital catalysts
The evolution of Japan’s governance framework is taking place alongside a broader transformation in the country’s capital markets.
One of the clearest signs of this is the acceleration in M&A and private equity activity. Japan has experienced a growing number of take-private transactions, management buyouts and strategic acquisitions, with financial sponsors increasingly willing to invest in companies where they see opportunities to improve operations, restructure corporate portfolios or deploy underutilised capital.
The threat of a change in ownership can itself become a catalyst for better governance and capital allocation, even when a transaction never ultimately takes place.
This does not mean that every undervalued company should be taken private. Public markets provide important benefits and many of the best outcomes for shareholders will come from companies remaining listed while improving their governance, strategy and capital allocation. But the growing willingness of financial and strategic buyers to acquire Japanese businesses has changed the negotiating dynamics.
Index overhaul
At the same time, the Tokyo Stock Exchange’s planned revision of the TOPIX index methodology represents another important development. The reform, which will take place over two years beginning in October 2026, extends the logic of Japan’s corporate transformation beyond individual companies and into the architecture of the market itself.
The Tokyo Stock Exchange is introducing tighter listing and continuation requirements, and an annual review of constituents with a view to streamline the TOPIX by hundreds of companies.
We expect this new wave of pressure, particularly on smaller companies, will make it increasingly difficult for businesses to maintain the status quo without addressing internal weaknesses. This should accelerate strategic change and corporate transformation across the market.
Companies that fail to adapt risk becoming progressively less visible to investors, while those that improve their governance, investor communication and market relevance may benefit from greater attention.
The next opportunity
If the first wave of Japan’s corporate governance reform was about unlocking trapped value, the next phase is about what companies do with that value.
This requires a deeper understanding of the underlying businesses, competitive dynamics and management teams. It also requires investors to distinguish between companies that are merely responding to external pressure and those that are genuinely changing the way they allocate resources.
For investors, the next generation of opportunities will require more detailed research, deeper engagement and a greater understanding of how individual companies can translate governance improvements into sustainable growth and returns.
Nicola Takada Wood is managing director, Japan at Asset Value Investors. The views expressed above should not be taken as investment advice.