Japan’s corporate governance reform gets serious
In 2015, Japan’s Financial Services Agency and the Tokyo Stock Exchange established a Corporate Governance Code — modernising a governance system traditionally characterised by main-bank oversight, cross-shareholdings and insider-led boards to encourage more transparent, accountable and growth-oriented management. Since then, the mindset of Japanese listed companies has changed considerably. The number of independent outside directors has increased, and many companies have implemented the Code’s key principles, resulting in some substantial increases in corporate value.
While the Corporate Governance Code achieved many of its intended objectives, challenges remained in improving corporate value across all Japanese listed companies. The 2026 revision to the Corporate Governance Code attempts to shift governance reform from a focus on formal compliance towards sustainable growth and long-term value creation. Whether the revision is successful depends on its ability to help companies create sustainable value for all stakeholders.
As of 2022, a relatively large proportion of Japanese listed companies continued to have low price-to-book ratios, which measure a company’s market value against the value of its net assets. The proportion in Japan is lower than in North America, Europe and other parts of Asia and suggests that markets view many Japanese companies as having limited growth prospects.
Japanese corporations also hold large cash reserves. In 2024, cash and cash equivalents accounted for approximately 16 per cent of the total assets of Japanese companies included in the TOPIX 500, compared to around 8 per cent for corresponding indices in Europe and the United States. Japanese companies may have understandable reasons for maintaining large cash reserves as protection against uncertainty, having experienced prolonged deflation, financial crises, natural disasters and the COVID-19 pandemic. But domestic and international investors increasingly expect firms to direct more of these resources towards growth-oriented investments.
The approach of Japanese companies to the capital market has changed considerably in recent years. In 2023, the Tokyo Stock Exchange called on companies listed on two of its markets to pay more attention to how efficiently they use capital and how their share price performs. Listed companies with an especially low price-to-book ratio have since been encouraged to analyse how effectively they are deploying their capital and to explain to investors any measures for improvement. The initiative has promoted meaningful dialogue with investors and the development of credible growth strategies. But partly because they are facing increasingly aggressive activist investors, more companies have felt pressured to boost short-term share-price performance by prioritising share buybacks and higher dividends over long-term investment.
The Corporate Governance Code has been revised three times since its introduction in 2015. Previous revisions have improved corporate behaviour in areas such as sustainability. Yet some argue that the growing number of principles and supplementary principles led companies to focus excessively on formal compliance without fully advancing the Code’s original purpose. Until 2022, the Tokyo Stock Exchange disclosed compliance rates for individual principles, many of which exceeded 90 per cent. These high rates of compliance raised questions about whether compliance had become overly formalistic.
The July 2026 revision to the Corporate Governance Code represents a significant shift in approach. Its central theme is a transition from formal compliance towards substantive value creation.
This revision introduces a preamble for the first time, delivering various messages — most notably the critical message that the true essence of the Corporate Governance Code lies in driving medium- to long-term corporate value. Rather than simply requiring companies to comply with individual principles, the revised Code encourages them to pursue initiatives that enhance their value through disciplined capital allocation and strategic investment.
The revision also places emphasis on stronger board oversight. Boards are expected to strengthen their oversight functions by discussing how resources should be allocated to future growth opportunities. This requires both executive and outside directors to participate fully in these discussions and represent the perspectives of shareholders and other stakeholders. Improving the quality and effectiveness of outside directors is central to the reform.
Companies are also expected to explain their medium- and long-term strategies more clearly to shareholders and other stakeholders. The principle of ‘comply or explain’ remains in place, requiring companies to follow the Code’s principles or explain deviations. But compliance alone is insufficient. Companies must engage in meaningful dialogue with investors and explain how their strategies will create value over time.
Though the revised Code has been slimmed down — with the number of principles reduced from 83 to 30 — it arguably sets a higher bar for corporate management. Streamlining the principles clarifies the goals of governance reform. Company executives can no longer simply follow the principles but must think proactively about how to enhance corporate value. Companies such as ASICS, DISCO Corporation and SWCC Corporation demonstrate that self-directed governance reforms — including in-depth board debate, constructive dialogue with investors and innovative incentive structures aligned with long-term value — can significantly improve corporate performance.
Japan’s economy is at a critical turning point, facing demographic decline and increasingly severe labour shortages. It is also emerging from a prolonged period of deflation into an era of positive interest rates amid rising geopolitical risk. The revised Code can encourage companies to rethink their business models in response to this changing economic environment.
Rather than relying primarily on cost-cutting to generate profits, companies must strengthen their ability to create value through investments in human resources, digital technologies and other intangible assets. They must develop higher value-added products and services while setting prices that reflect that value. Companies should also seek to sustain returns on invested capital — the profits generated from money invested in a business — that exceed their weighted average cost of capital, which is the average cost of financing their operations. This should be done while continuing to invest in future growth.
Strong performance in Japanese equity markets has attracted growing interest from both domestic and international investors. If Japanese companies use this opportunity to articulate and execute compelling value-creation strategies while balancing capital efficiency with long-term investment, the revised Corporate Governance Code has the potential to become an influential reform.
Beyond boosting business growth, the revised Code’s emphasis on human-capital investment and fair distribution of gains could support wage growth and reduce social disparities. The reform’s success will be judged not by how faithfully companies comply with the Code, but by whether it helps them create sustainable value for shareholders, employees and society.
Yuri Okina is Senior Fellow at the Japan Research Institute and Specially Appointed Professor at the Graduate School of Hitotsubashi University.
This article appears in the most recent edition of East Asia Forum Quarterly, ‘Japan’s normalisation’, Vol 18, No 3.