Once a powerhouse of the global economy, it’s been a long time since Japan’s boom years in the early 90s. However, a resurgence is underway, driven by foreign investments and enhancements in corporate governance.

During Japan’s boom years in the early 90s, Japanese companies were worth more than half of the world’s total market value, and even the land around the Tokyo Imperial Palace was valued higher than all the real estate in California.[1]

Since then, Japan’s economy has endured years of poor performance. Indeed, the stock market index for the Tokyo Stock Exchange, the Nikkei index, has still failed to get back to the high point it reached in the late 1980s.[2]

However, a resurgence is underway, driven by foreign investments and enhancements in corporate governance. Just last year, the Nikkei index grew by 28%,[3] bringing a surge in optimism of continued growth and innovation.

Japan’s economic revival

Tackling deflation

Unlike in many other developed countries, Japanese policymakers have been concerned about a lack of inflation, or rather, deflation. Deflation has made it difficult for businesses to raise their prices and grow earnings. That said, one of the key signs of Japan’s economic recovery is seeing prices sustainably rise.  

Inflation in Japan was above 3% for much of 2023, which is considerably higher than in the 2010s when inflation averaged 0.5%.[4] The Bank of Japan hopes to sustain this trend by keeping monetary policy relaxed. For this approach to work, people in Japan will likely need to spend more money. That’s why many are paying close attention to the wage increases that workers can negotiate for during this year’s bargaining period, called a “shunto”, which usually happens in March. 

Shareholder value & corporate governance

Japanese companies are working hard to use money more efficiently and drive profitability. Japan’s government has been working on this for more than a decade, starting with a programme called “Abenomics” initiated by the former Prime Minister, Shinzō Abe.

Abenomics is a package of policies introduced in 2012, each aimed at achieving sustainable economic growth. With this, the government began introducing rules for companies to follow, like the Corporate Governance Code in 2015 and the Guidelines for Investor and Company Engagement in 2018.

In 2021, the Corporate Governance Code was further updated to include rules about having independent and diverse boards, as well as considering sustainability and factors. In 2023, the Tokyo Exchange Group updated its guidance to say that all listed companies trading on the stock market must “comply or explain” if their market valuation is lower than their balance sheet assets.[5]

Broader stakeholder benefits

Japanese companies are paying more in dividends to shareholders and are buying back their own shares,[6] which suggests that positive change is emerging and could continue to improve. There’s likely room for further improvement, given over half of Japanese companies have more cash than they owe.[7] This is much more than in Europe, for example, where only about 22% of companies hold extra cash.[8]

We believe these governance improvements will go further than simply benefitting shareholders. They should stimulate the conditions for greater stakeholder alignment, benefitting everyone from employees to customers.

For example, there’s already been sustained progress in getting more women onto corporate boards and into management roles. The Egon Zehnder Global Board Diversity Tracker found that women in Japan held 13.6% of board seats in 2022 across the 127 companies included in their study. This leaves plenty of room for improvement, but is notably over 50% higher than in 2020, when that figure was 8.8%.[9],[10]

Further evidence of progress in better, more accountable governance stems from an increase in the number of Japanese companies with two or more independent directors, which has climbed from 22% of companies in 2014 to 99% in 2023.[11]

Additionally, in 2022, Japan witnessed the single biggest increase in adoption anywhere in the world.[12] It’s for this reason that we believe that Japan offers an opportunity for investors who incorporate and broader factors in their decision-making.

Market participation

The final factor helping to revive Japan’s economy is the increased interest from people in Japan to invest in the stock market. The government introduced new rules for tax-free savings accounts, called NISAs (Nippon Individual Savings Accounts), which make it more appealing for Japanese households to invest in stocks.

Japanese households have more than 2.1 quadrillion yen ($14.16 trillion) of financial assets, and a reluctance to take on risk has meant they keep more than half of it in cash, far more than in other developed economies.[13] However, there’s a concern that if these accounts become popular, a lot of the money may be used to buy foreign stocks instead of supporting the Japanese economy.

In summary, Japan’s corporate landscape is witnessing an impressive transformation underpinned by governance improvements and proactive investor engagement. Although it’s still in its early stages, these developments offer a positive outlook for sustainable and responsible investment opportunities, highlighting a story of economic renewal and potential.

[1] Japan in the 1980s, South China Morning Post

[2] Nikkei 225 Index, Bloomberg

[3] Ibid.

[4] Bloomberg

[5] TSE’s Recent Initiatives on Corporate Governance, Tokyo Stock Exchange

[6] Japan firms’ share buybacks expanded to a record $65bn in 2023, Nikkei Asia

[7] 10 Reasons the Surprise Rally In Japanese Stocks Could Continue, Morningstar

[8] Ibid.

[9] 2022/23 Global Board Diversity Tracker, Egon Zehnder

[10] In the EU, since the adoption of the Women on Boards Directive in November 2022, there has been an increase in the rate of female appointments into all board roles from 35% to 43% and for non-executive roles (NED) roles from 41% to 48% (as of January 2024). Source: Gender balance in business and finance, EIGE

[11] Japan is Changing Slowly, Financial Times

[12] Corporate climate action accelerated in 2022, with an 87% increase in companies setting science-based targets, Science Based Targets

[13] Kishida’s NISA bet is paying off, just not for Japanese stocks, Reuters