A new era: An investor's view on the Takaichi revolution

Governance devotees in Japan look back fondly to March 2023, the month when the Tokyo Stock Exchange (TSE) insisted that listed companies manage their capital more efficiently and be more conscious of profitability and share prices. Pressure had been building for such a pivot for the best part of 20 years, with regular criticism of corporate managements for hoarding cash, paying low dividends, and ignoring corporate value. From a shareholder perspective, the TSE’s policy, recently updated, tangibly moved the needle in their direction.

It is likely this same group will have more mixed views about the past month, July 2026, which saw the publication of a series of documents outlining or supporting the new industrial policies of the Sanae Takaichi administration. These policies are set to have a profound effect on corporate governance and the meaning of capital management in Japan in the coming years. The needle is now moving in a different direction.

Growth and resilience

On just one day, July 21, the government released three major announcements. The biggest was the Cabinet’s approval of “Japan’s Growth Strategy”, the signature national economic policy of the new administration. It seeks to turbo charge domestic investment in strategic sectors and build national resilience and security across the board, in society as much as the economy, IT and defence. These moves are driven by current geopolitical tensions and the intense competition between countries in new industries. Yet it is already clear that shareholder interests are much less of a priority for Takaichi.

A complementary event was the release of new guidance on “Growth Investment” from the Ministry of Economy, Trade and Industry (METI). This hefty document directly questions the value of the capital management reforms of the past decade, arguing that short-term improvements in financial metrics among listed companies have not led to investments in growth and wage increases. It calls this the “new paradox”. Instead, companies should make “bold growth investments in capex, R&D and human capital” for the good of “the economy and society”.

The other matching item was the publication of Japan’s newly revised “Corporate Governance Code”, the fourth version since 2015 and one which brings fundamental changes to the structure and functioning of the code. The risk is lower disclosure quality and reduced accountability mechanisms. Yet the government argues this is necessary to lessen cost burdens for listed companies and enhance their future competitiveness in the name of boosting growth. (See our analysis, “An unconvincing revision”.)

Before the month was over, July 30 saw the launch of METI’s supplementary guidance on its 2023 “Guidelines for Corporate Takeovers”, giving boards much wider latitude to oppose takeover bids they do not like. The new guidance comes with the ominous subtitle, “Reconfirmation of the Intent for More Appropriate Practice”. (See our analysis, “METI’s mixed message.”)

In the coming months, Firefly will be taking a deep dive into the Takaichi government’s new industrial policies and consider their long-term impact on capital markets and corporate governance in Japan. It is a complex picture, with significant risks as well as some interesting engagement opportunities for public-equity shareholders. If done well, the policies could even raise the game for boards in Japan.

To set the scene and give a flavour of changes on the ground, Firefly caught up recently with a capital market expert in Tokyo who takes a strong interest in governance matters. Here are his views, quoted verbatim, on some of the big issues of the day.

On shareholder value:

“Takaichi wants companies not to hoard cash, but to invest. There is some alignment with the shareholder side, such as boards needing more skilled directors. But where the government is not on board is in the increase of shareholder value. They are OK when companies hit the accelerator on investments, but share buybacks and boosting shareholder value is not OK. This is an important part of the new Japan.”

On TSE’s promotion of capital efficiency:

“There is a clear difference in view between the TSE and government. The TSE folks see the importance of investing and agree that companies have under-invested. But there are going to be sectors and industries that will not grow. So the focus should be on the bottom line (not the top line), on issues of capital efficiency, and how much companies can streamline their balance sheets. The government is not OK with this. It thinks that every sector under the sun should invest in growth.”

On takeovers and national security:

“METI says there needs to be a new understanding of corporate value in terms of national security interests and supply chain management. For example, a new owner may want to slash costs and look at sourcing from supply chains that do not take national security into account. That is, from China. There should be more sourcing from within Japan.”

On future M&A and activists:

“Companies are looking at activists. The government is looking at China. Both are aware we are approaching an inflection point in Japan, with lots of assets for sale in future. The government does not want some of these assets to go on sale. The market wants the highest bidder to win.”

“Companies are in a difficult position with activists telling them to do XYZ to boost value. They need cover. So the two sides have completely aligned on this front (against activists).”

On the new METI guidance on takeovers:

“There are lots of issues from the minority shareholder rights point of view. What happens if a buyer offers a discounted value. Will shareholder rights be trampled upon?”

A discontinuity

While many formal elements of Japan’s existing corporate and market governance regime remain in place, the political backdrop has changed dramatically. We recognise that the government is in a difficult position: it wants to move forward with a radical new industrial policy while keeping investors and the market on side. It is going to be a tough balancing act.   

jallen@fireflyreads.com

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