Activism at Scale in Japan
The TSE's reforms are driving big changes in capital allocation
By: Daniel Rasmussen, Lionel Smoler Schatz, and Yuto Kida
Japan has been in the headlines for the carry trade unwind and unprecedented Yen volatility. But these wild market moves should not distract investors from the very positive medium-term story unfolding: corporate Japan is currently making big changes in capital allocation and governance.
Last year, the Tokyo Stock Exchange issued a directive asking all companies with price-to-book ratios below 1x to issue a plan to get to 1x book. The reforms aimed to help Japan shake off its reputation as a “value trap.” At the time of the announcement (March 2023), around 50% of companies in the Prime Section and 60% of firms in the Standard Section had a PBR <1x, reflecting a shocking degree of pessimism and inattention by investors. Over the past year, companies issued plans and posted them to the TSE’s website.
We did a systematic review (methodology described below) of every plan issued by companies on the TSE’s Prime and Standard Section (3,247 firms) to assess the impact of these reforms. And the answer, we believe, is that dramatic change is afoot, with widespread dividend and buyback increases. This is activism at scale—a compelling catalyst for a continued rally in Japanese stocks.
As of the end of June, based on the TSE’s monthly list of disclosed companies, 50.9% of firms have disclosed plans and 9.8% are considering. The chart below summarizes the tangible actions being taken by the companies that have issued plans.
Figure 1: Tangible Actions Taken by Companies Issuing Plans
Source: TSE, Verdad analysis
The majority of companies issuing plans are increasing dividends, almost a quarter are repurchasing shares, and over 10% are selling cross-share and strategic holdings. This is truly widespread change.
We used very strict standards for judging whether a company was taking a tangible action. To do this analysis, we developed an automated AI analysis tool that scraped the disclosed action plans of the firms from various sources, including the TSE Corporate Governance Report Database, and the respective firm’s financial briefings and mid-term management reports. We identified three distinct categories that represented the companies’ plans to achieve 1x book: increasing dividends, selling cross-share holdings, and repurchasing or eliminating shares. Using this AI analysis tool, we were able to identify whether each company had provided a specific plan that falls within each category. All plans offered pablum about increasing shareholder value through growing the company and becoming more efficient, but we focused only on tangible action plans that specifically highlighted a time period or a quantitative amount (e.g., ¥1 billion of share repurchases in FY2025) that reflected an improvement over prior practices (e.g., increase dividends by ¥15 per share versus maintaining dividend payout ratios at current levels).
Looking at individual companies, we see that some of the plans reflect truly major course changes for some of Japan’s smaller companies. Here are a few of the highlights:
T.RAD Corporation (¥24 billion market cap) has announced plans to allocate ¥10 billion to increase dividends and repurchase shares.
TOLI Corporation (¥25 billion market cap) has announced plans to allocate ¥4 billion to increase dividends and repurchase shares and generate another ¥2 billion by selling cross-share holdings and reducing assets.
Neturen (¥39 billion market cap) has announced plans to repurchase shares worth around ¥6 billion and allocate more than ¥4.6 billion to dividends by 2026.
NPR-Riken (¥72 billion market cap) has announced plans to repurchase shares worth ¥10 billion and generate ¥3 billion by selling cross-shares and reducing assets.
Nippon Seiki (¥82 billion market cap) has announced plans to allocate ¥25 billion to increase dividends and repurchase shares from 2025 to 2027.
These changes appear to be driving stock market performance. We looked at the percent change of the stock price of companies between March 31, 2023, which is when the TSE made their announcement, and June 30, 2024. We show the results below.
Figure 2: Stock Price Reaction to Corporate Reform Plans
Source: Capital IQ, Verdad analysis
Firms that have made an effort to lay out a specific and tangible action plan to reach 1x book have experienced a significant rise in their stock prices since the TSE announcement, more than double compared to companies that haven’t disclosed or are still considering doing so. We can see that the market has generally reacted positively to the companies’ disclosed plans and that the TSE’s “name and shame” tactic is working so far. It seems like whether the Japanese stock market continues to build on its momentum depends on the willingness of companies to be transparent about and responsive to the TSE’s request to reach 1x book.
The Nikkei surpassed its 1989 peak of ¥38,915 in March of this year. If the momentum from these reforms continues, Japan’s market could have a long way to run.
Acknowledgment: Yuto Kida is a rising junior at Yale University from Tokyo, Japan. He studies Economics and Data Science and is interested in pursuing a career in finance after college. Beyond the classroom, he is involved in research at the Yale School of Management and is a member of the Yale Club Tennis team. He also takes care of his bonsai tree back home. Please reach out to us if you would like to connect with Yuto.