The Tokyo Stock Exchange (TSE) has taken another major step to enhance corporate governance, signaling a deeper push for market reform. In particular, these efforts reflect Japan’s growing commitment to improving corporate governance across listed firms, especially those on the Prime Market. Recently, officials from the TSE announced updated guidelines that will target companies with weak capital efficiency. Specifically, the exchange urged firms trading below book value to present clear strategies for improvement. Importantly, these updates build on earlier reforms launched in 2022, aimed at revitalizing Japan’s equity markets and attracting global investors.
At the heart of the initiative, corporate governance remains the central theme. TSE executives noted that companies must now outline how they will raise shareholder value and restructure inefficient operations. Otherwise, firms that fail to respond may face reputational pressure or risk losing investor support. Moreover, the exchange’s latest move comes after continued scrutiny of underperforming firms with sluggish price-to-book ratios. According to recent data, over 50 percent of companies on the Prime Market trade below book value. Consequently, these figures raise concern about management practices and long-term growth strategies.
To address these concerns, the TSE has asked listed companies to disclose action plans for capital improvement. Notably, these disclosures must be updated annually and show measurable progress. In line with global standards, the focus will remain on sustainable returns and better alignment with shareholder interests. Meanwhile, corporate governance experts have welcomed the reforms but say execution remains critical. Many investors have expressed support for these efforts but want faster and more decisive implementation. Furthermore, institutional shareholders continue to demand higher transparency and stronger board oversight.
In response, the Japan Exchange Group, which oversees the TSE, said these reforms aim to make the Tokyo market more competitive. The group believes enhanced governance can drive long-term value and restore confidence among foreign investors. More broadly, these changes reflect Japan’s response to global trends in shareholder activism and responsible investing. Improved governance is expected to boost capital inflows and support economic growth through better-performing companies. Looking ahead, the TSE will monitor compliance closely and release performance reviews in early 2026. Market analysts expect the new guidelines to pressure firms into faster transformation. Ultimately, as corporate governance becomes a central driver of valuation, companies may need to rethink strategies to stay competitive in a changing financial landscape.
