Corporate reforms seen fueling Japanese stocks in 2026ーNHK WORLD-JAPAN NEWS

Key Concepts

• NIKKEI 225: The main index of the Tokyo Stock Exchange.
• Capital Efficiency: A measure of a company’s ability to generate profit from its capital.
• Cross-Shareholdings: The practice of companies owning shares in each other.
• Corporate Governance Code: Guidelines for how companies are directed and controlled.
• Labor Share: The proportion of national income that goes to employees as wages and benefits.
• Delisting: The removal of a company’s stock from a stock exchange.
• Activist Stockholders: Investors who use their share ownership to influence a company’s policies.

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The Resurgence of the Tokyo Stock Market & Corporate Governance Reforms

The Tokyo stock market experienced significant growth in 2025, with the NIKKEI 225 climbing over 25%. However, this period also saw a record number of companies – 125 in total – delisting from the Tokyo Stock Exchange (TSE). This seemingly contradictory trend is central to a broader shift in Japanese business practices, driven by pressure from the TSE and evolving economic conditions.

TSE Pressure for Improved Performance & Delisting Trends

Beginning in 2023, the TSE signaled a commitment to improving the quality of listed companies. Officials indicated that companies failing to demonstrate improved capital efficiency and strengthen management practices would face review of their listing status. This pressure has manifested in a surge of delistings. While many companies voluntarily delisted to pursue long-term strategies without investor scrutiny, others succumbed to demands from activist stockholders.

A specific example cited is QP’s acquisition and subsequent delisting of its subsidiary, Alata, a gem maker. Experts note that in such cases, the interests of the parent company are prioritized. Inov Jun, from an asset management company, explains this shift, stating, “the days of unprofitable companies and sleepy boardrooms are over in Japan.” He attributes this change partly to the historical prevalence of cross-shareholdings and a prolonged period of low interest rates, which previously shielded companies from takeover threats.

Corporate Governance Reform: A Three-Step Approach

The TSE’s drive for reform is viewed as a systemic change already understood by market participants and management teams. Experts anticipate a “third step” in corporate governance reforms this year, involving a five-year review focused on the rationale for companies holding large cash reserves. This is significant given that Japanese companies are renowned for “hoarding” substantial cash. The Ministry of Finance reported internal reserves exceeding 600 trillion yen (approximately $4 trillion) in the last fiscal year.

The anticipated revision of the corporate governance code is expected to encourage companies to deploy these reserves through increased dividends, share buybacks, investments, acquisitions, or higher employee salaries. As You Know states, “I think what is going to happen is that they need to find a way to use the cash.”

The Importance of Increasing Labor Share

A key component of the anticipated economic benefits is an increase in the labor share of profits. Japan’s labor share is comparatively low among developed economies, with a gap of 15-20%. Real wages have been declining for 11 consecutive months as of November, highlighting the need for change.

You Know argues that raising real wages will benefit both the stock market and the broader economy. He elaborates on a positive feedback loop: increased labor share provides consumers with more income, boosting consumption, which in turn increases company revenue and profits. This allows for further distribution of profits to both shareholders and workers, creating a “positive spiral” for the Japanese economy. He states, “Company has a good amount of profit… once they started to change the labor share… that would provide a sort of extra source of income for consumers.”

Foreign Investor Reception & Future Outlook

The corporate governance reforms have been positively received by foreign investors, and You Know anticipates this enthusiasm will continue to drive Japanese stock prices higher in the coming year. The reforms are seen as a fundamental improvement in the attractiveness of Japanese equities.