Further Revision of Governance and Shift in Management Resource Allocation: Expanding the Scope of Growth Investment in the Japanese Stock Market

Review of 2025

The Japanese equity market in 2025 experienced a broadly strong upward trend. The TOPIX (including dividends) rose +25.5% for the year, following gains of +28.3% in 2023 and +20.5% in 2024, marking the third consecutive year of returns exceeding 20%. Value stocks led the overall market, with the TOPIX Value Index rising 30.4%, significantly outperforming the TOPIX Growth Index, which gained 14.5%.

In the first half of the year, market attention focused on progress in AI infrastructure development by Chinese companies, which heightened concerns about the outlook for U.S. AI platform companies. In addition, uncertainty surrounding U.S. tariff policies came into focus, and fears of a slowdown in global trade spilled over into Japanese equities. Immediately after President Trump announced tariff rates, cautious views regarding supply–demand conditions and earnings prospects spread, particularly among globally-exposed manufacturing companies, leading to a sharp but temporary decline in share prices.

From the middle of the year onward, however, as tariff negotiations with the United States made progress, market caution gradually receded and stock prices turned upward. In the AI sector as well, contrary to concerns earlier in the year, competition among companies accelerated, and global interest in AI-related themes increased once again. As a result, share prices of related companies posted significant gains.

On the domestic front, political developments surrounding the House of Councillors election in July attracted market attention. Expectations also rose at times regarding post-election governance and policy direction, particularly in areas such as fiscal expansion, national security, and a greater emphasis on domestic investment. In addition, shareholder-oriented corporate actions—such as share buybacks, dividend increases, and business restructuring—were active throughout the year and became an important factor supporting the Japanese equity market from a supply–demand perspective. Under these circumstances, share prices remained resilient even during periods of yen appreciation in mid-year, suggesting that the market has become less sensitive to currency fluctuations.

Revisions to the Corporate Governance Code

One of the key points to watch in assessing Japanese equity trends in 2026 is the revision of the Corporate Governance Code, scheduled for the first time in approximately five years. The focus of this third revision is expected to be how to address the issue of so-called “cash hoarding,” or excessive holdings of cash and deposits. Discussions are likely to move in the direction of clarifying corporate accountability regarding the level of cash holdings and policies for their use. This awareness is also reflected in the Action Program for the Realization of Corporate Governance Reform 2025, published by the Financial Services Agency in June 2025 (*1), which outlines the future direction of discussions.

The balance sheets of Japanese companies have continued to improve over a long period since the late 1990s. According to the Financial Statements Statistics of Corporations by Industry, in 1996, cash and deposits held by Japanese companies (all sizes excluding financial and insurance companies) totaled JPY 130 trillion, accounting for less than 10% of total assets. By 2024, this figure had increased approximately 2.3 times to JPY 301 trillion, with the ratio to total assets rising to 13%. In contrast, borrowings increased only modestly over the same period, from JPY 559 trillion to JPY 603 trillion, while their share of total assets declined significantly from 43% to 28%. Thus, over the past roughly 20 years, Japanese companies have prioritized balance sheet strengthening over growth-type investment. As a result, however, it cannot be denied that allocations of management resources toward growth-oriented areas—such as capital expenditures, M&A, and investment in human resources—have been constrained.

The Corporate Governance Code, established in 2015, has served as the core of governance reform in Japan by requiring listed companies to respect shareholder rights, cooperate with stakeholders, enhance disclosure, and improve board effectiveness. Following revisions in 2018 and 2021, its content has been gradually enhanced. Furthermore, in 2023, the Tokyo Stock Exchange requested companies to “take action toward achieving management that is conscious of capital costs and stock prices,” which further intensified market pressure on companies and rapidly heightened awareness and disclosure regarding capital costs and ROE.

Against this backdrop—after more than a decade of governance reform and a growing emphasis on capital efficiency—the third revision is expected to step further into policies regarding the utilization of balance sheets themselves, including cash and deposits. Given that the gradual enhancement of requirements has allowed companies time to prepare, this revision is likely to go beyond formal requests and result in measures with real effectiveness.

Allocation of Management Resources

If Japanese companies’ appetite for investment increases, where will management resources be allocated? The direction can be read relatively clearly by considering both recent changes in the business environment and policy support.

First, changes in the business environment surrounding companies. The COVID-19 pandemic and U.S.–China trade friction exposed vulnerabilities in globally optimized supply chains. As a result, moves toward diversification of procurement and production, as well as reshoring, have spread, and investment to strengthen domestic production capacity in Japan has gradually begun to increase. Another important change is the expansion of demand—particularly in the service sector—driven by an increase in inbound tourism supported by a weaker yen.

At the same time, a structural challenge facing the Japanese economy is chronic labor shortages due to population decline. Even if demand expands, supply constraints could hinder growth, and for companies, improving productivity through capital investment is increasingly becoming not an “option” but an “issue that must be addressed.” Furthermore, advances in digital technologies such as AI have expanded the scope for automation and sophistication even in areas that previously relied heavily on human labor, broadening the range of potential investment targets beyond the past.

Supporting these changes in corporate behavior is a shift in the government’s policy stance. With a clearer emphasis on economic security, domestic investment, and technological self-reliance, policies have been introduced to prioritize investment in advanced technologies and security-related fields. As a concrete example, 17 strategic fields (*2)—including AI and semiconductors—have been designated, along with institutional support frameworks such as tax credits and immediate depreciation to encourage corporate investment decisions.

In addition, the Action Program for the Realization of Corporate Governance Reform 2025 presents a more proactive direction regarding how companies allocate management resources. Beyond capital expenditures, it explicitly identifies a wide range of growth investment options, including R&D, development of regional bases, investment in startups, and investment in human capital and intellectual property. Overall, in phases when Japanese companies’ investment appetite strengthens, it is expected that capital investment aimed at meeting short-term demand and investment in technology, talent, and intellectual assets aimed at strengthening medium- to long-term competitiveness will proceed in parallel.

Based on the above, from an investment perspective, it is important to assess individual company fundamentals while being mindful of the potential expansion of growth-oriented resource allocation and structural transformation of the Japanese economy. Under this strategy, we will focus on companies that can capture the trend of expanding capital investment as a growth driver, as well as those that can enhance value added through investment, and will pursue stock selection based on fundamental analysis.

*1 “Action Program for the Realization of Corporate Governance Reform 2025”

[https://www.fsa.go.jp/news/r6/singi/20250630-1.html]

*2 The 17 strategic fields:

(1) AI and semiconductors, (2) shipbuilding, (3) quantum, (4) synthetic biology and biotechnology, (5) aviation and space, (6) digital and cybersecurity, (7) content, (8) food tech, (9) resources, energy security, and GX, (10) disaster prevention and national resilience, (11) drug discovery and advanced medical care, (12) fusion energy, (13) materials (critical minerals and components), (14) port logistics, (15) defense industry, (16) information and communications, and (17) marine.