How JPX plans to position Japan as Asia's premier investment hub

In March 2024, the Nikkei 225 roared past the 40,000 mark, crowning a record-breaking year for Japan’s financial markets, which also saw increased IPO activity, as 97 companies went public to raise +570 billion yen, and a surge in private equity dealmaking with deal values nearly tripling the annual average from 2018 to 2022. This favorable backdrop drew an unprecedented flood of foreign capital into Japan’s financial markets, with foreign investments in Japanese equities reaching a 10-year high. What were the core reasons for the extraordinary performance of Japan’s investment markets?

No singular catalyst has driven this market shift; rather, multiple factors have combined, both domestically and internationally, with some beyond our control and others within our influence.

First and foremost is Japan’s exit from a long deflationary period. After over two decades of deflation, where price stagnation restricted pricing power and wage growth, creating a negative feedback loop, recent conditions have been more favorable. Multiple past administrations attempted to alleviate deflation’s impact on economic dynamism but found that isolated measures could not make significant headway. Today, however, Japan is finally emerging from this deflationary trap, assisted initially by cost-push inflation from elevated energy and grain prices due to geopolitical events, such as the Russian invasion of Ukraine. As we transition into demand-pull inflation, a virtuous cycle of wage and price increases is beginning to take hold.

Under deflation, both corporations and households adopted a “cash is king” approach, favoring bank deposits as returns on cash effectively appreciated. With inflation now a factor, capital is flowing from deposits to investment opportunities. For instance, FY2024, corporate capital expenditures are projected to exceed JPY 100 for the second consecutive year, with funds channeled toward production capacity, R&D, and workforce development, priming future returns from these strategic investments.

A second key driver is the robust performance of Japanese corporates. FY2023, which ended in March 31^st 2024 marked the third consecutive year of record-high profits, and FY2024 Q1 results have further strengthened this trajectory. With labor shortages pushing firms toward digital transformation and automation, we foresee sustainable returns from these capital deployments over the medium term.

Geopolitical shifts comprise the third factor. Historically, investment from the US and Europe in Asia concentrated heavily on China, largely bypassing the Japanese stock market. However, with heightened US-China tensions, a reallocation of capital is underway, benefiting both Japan and India. Japan’s appeal is amplified by its open market, stable regulatory framework, and democratic governance. While some short-term capital might return to China amid recent stimulus, the reallocation of funds to Japan appears more stable.

Fourthly, the expanded Nippon Individual Savings Account (NISA) under the Kishida administration has also bolstered domestic investment. This program, recently made permanent, has directed substantial capital to Japanese equities. According to the Japan Securities Dealers Association (JSDA), from January to September 2024, JPY 10.2 trillion in new investments flowed into NISA, with 40% allocated to high-dividend Japanese stocks and a significant portion of the remaining funds going to global balance funds with a Japanese exposure component. This resulted in over JPY 5 trillion going into the domestic market. Moreover, despite market volatility in early August, the net inflow into NISA remained positive, underscoring investor commitment to this long-term investment vehicle.

Lastly, corporate governance reforms have been instrumental. The stewardship code introduced in 2014 and the corporate governance code in 2015 have laid the groundwork for sustainable value creation. Despite early resistance, voluntary, incentivized reforms have gradually reshaped the landscape. Now, nine years on, these reforms—supported by market segment restructurings and a focus on equity cost awareness—have delivered visible gains in corporate governance, underpinning sustainable, mid- to long-term value.

In summary, these five factors have collectively underpinned the current market rally, creating a promising environment for continued capital appreciation.

In recent months, a cloud of apprehension among investors has slowly begun to materialize. At the core of those worries has been the argument that Japan’s most recent performance is based on macroeconomic conditions and “external factors”, and that an eventual strengthening of the yen or repeated hikes in interest rates could trigger a downfall; worries that were exacerbated by the August market crash, which saw the unwinding of the yen carry trade. On the other hand, analysts have argued that “internal factors,” such as the TSE’s corporate governance reforms together with the Government’s push to better the investment environment through initiatives such as the new NISA account will carry this bullish momentum forward. Should macroeconomic conditions normalize, do you believe that those “internal factors” will be enough to push the bullish momentum forward?

External forces undeniably shape markets globally, influencing trends not only in Japan but across the US, Europe, and beyond. Internally, however, factors like NISA and corporate governance reform hold particular significance.

For NISA, notably, adoption by younger investors is substantial, with those under 50 representing close to 50% of accounts and around 43% of total investments. As the inflationary outlook rose in the past year or so, Japanese households are seeking viable inflation-hedging instruments, experiencing change in the mindset from “savings to investment.” This shift marks a key evolution in Japan's retail investment landscape, suggesting continued growth in household participation.

Regarding corporate governance, Japan's market dynamics have evolved remarkably. In the past, foreign shareholders were often regarded as more vocal but now, Japanese institutional investors have introduced their own voting policies and are becoming increasingly proactive. While perceptions of these policies may vary, we believe these frameworks drive accountability not only among corporate management but also within Japan's investment community itself, establishing a form of peer pressure. This momentum is unlikely to diminish, even if macroeconomic conditions stabilize, as Japan’s corporate and investment sectors have embraced these shifts. Someone mentioned the effect that this is having is similar to a snowball: the more it rolls, the bigger it becomes. And now it is rolling down a steeper hill than before, with much more speed.

In January, the Japanese government announced a revamp of the NISA, or the Nippon Individual Savings Accounts, a tax-free stock investment program for individuals. This move aims to turn the trillions of JPY held in cash by households into investments in riskier assets, such as the stock market. Yet, the most popular investment vehicle among Japanese households has traditionally been mutual funds tracking US and other global stocks. Do you believe that the NISA account will be successful in reversing that trend and driving more investment from Japanese households into Japan?

Diversification across investment vehicles is a sound strategy, and I am not particularly concerned of investments made into US or other global stocks, as part of such. It’s essential, however, for investors to understand that international investments carry exposure to exchange rate fluctuations. Examining the past five years, global balanced funds and individual U.S. equities, for example,  those tracking the "Magnificent Seven," have shown substantial appreciation. Coupled with the yen’s significant depreciation, these investments have yielded impressive returns in yen terms. This is favorable, yet historical context reminds us that the yen can reach levels as strong as 78 or 79 against the dollar. Such currency volatility remains outside investor control, introducing inherent risk for overseas allocations, which investors must consider.

This understanding is critical, especially as individual investors focus on longer-term horizons—five, ten, or even 20 years post-retirement—rather than short-term performance metrics to build their assets. For those investing long-term, daily fluctuations in stock prices and exchange rates are less of a concern.

Regarding JPX's role in advancing investment, as a market operator, we serve as a “platform provider”. Our mandate extends beyond individual companies; we bear responsibility for the entire market ecosystem, positioning us to promote the strength and qualities of Japan’s markets globally.

The Tokyo Stock Exchange released a series of corporate governance reforms aimed at enhancing the fundamental appeal of Japanese companies. These have included a push to increase transparency by reducing cross-shareholdings and enhancing capital efficiency in order to heighten corporate accountability and bolster long-term shareholder confidence. Early result are found in the substantial increase in share buybacks. As of May 2024, approximately 9 trillion yen in buybacks has already been announced, positioning the market to set a new record for the fourth consecutive year. How do you rate the effects that those reforms have had on Japan’s corporate environment?

Our ongoing corporate governance reforms in Japan represent a strategic, long-term commitment to enhancing governance practices across listed firms. For instance, our request at the end of March last year was not an isolated action but rather part of an overarching initiative in governance reform. Since the introduction of the Corporate Governance Code in 2015, we’ve made two critical updates in 2018 and 2021. Notably, the 2021 revision was pivotal, as the Corporate Governance Code was aligned with the new market segments later introduced in 2022. For instance, governance requirements were strengthened for new Prime-listed entities.

Then we had the cash equity market segment restructuring in April 2022—a significant shift after 60 years, which included streamlining market segments that stayed after the merger of the Tokyo and Osaka Stock Exchanges back in 2013. After the introduction of the new market segments, from July 2022, a council of market experts has been discussing further measures to reinforce the market function, meeting monthly, with transparent publication of minutes in both Japanese and English. In late March last year, we requested management of Prime and Standard-listed firms to remain aware of their equity costs and share price performance—not to solely increase buybacks or dividends but to allocate resources towards long-term growth investments such as R&D, production assets, human capital, and portfolio restructuring. This approach recognizes the importance of reinvestment over capital return purely for short-term valuation metrics, like the price-to-book ratio (PBR).

Recently, companies are using buybacks to manage their equity base, a trend that reflects the current phase of Japanese corporate governance. Often, it is said that Japanese companies’ average net equity ratio is higher than those of the US or European companies. Japan’s historically thicker equity ratio can be linked to two major crises—the global financial crisis and COVID-19—exacerbated by long-term deflation. With inflation now on the rise, companies are increasingly incentivized to pursue growth-focused reinvestments.

One analysis shows that cross-shareholdings, which used to comprise approximately 50% of the market cap, are now down to about 12%. Our corporate governance code advises companies to assess the purpose of such holdings and to disclose their policy for divesting those that lack a  clear strategic justification. A crucial consideration is that companies divesting these holdings must allocate capital effectively—a key factor in our ongoing engagement.

The Japan Financial Services Agency (JFSA) is examining life insurers’ holdings for potential governance conflicts. Firms that transfer holdings from policy to investment accounts without rebalancing may face scrutiny under tighter regulations.

Looking at the future, what further reforms would you like to see corporate Japan embrace?

Given heightened awareness among Japanese management regarding growth imperatives, inflationary pressures, and intensifying domestic and international competition, an uptick in corporate actions appears likely. While Japan may not reach U.S.-level activity, M&A transactions from January to June this year hit approximately 2,300 —a record high for a six-month period.

Following the recent market restructuring and updated listing criteria, the requirements for listings in the Prime section of the TSE are more demanding. As a result, around 500 companies opted to transition to the Standard Market, illustrating an evolution in the rationale for public listings. Costs associated with Prime listings extend beyond direct financial expenses as they also include the ongoing demands on investor relations and the need to maintain compliance. Firms are now closely evaluating whether the benefits of Prime listings outweigh these burdens.

Over the past three years, Japan experienced 216 delistings related to corporate actions, marking a more than 40% increase compared to the 151 delistings in the preceding three-year period. These delistings predominantly resulted from management buyouts and M&A transactions, underscoring the role of market mechanisms in maintaining discipline within the corporate ecosystem. Assuming market functionality remains robust, these dynamics are expected to persist.

Tender offers represent another marker of increased activity: last year, Japan recorded 74—a record high. With 63 already filed by September’s end, a new annual high may well be achieved this year.

Given these factors, we anticipate an increasingly active market with growth potential driven by consolidations and asset divestitures. This environment presents promising opportunities for investors as Japan’s corporate landscape evolves.

Japanese equities still have room to attract new foreign capital. While European and Asian investors have been leading the charge, North American investors have yet to fully rotate into the Asian island. The U.S. had a relatively small presence for its market size, averaging just 65 billion yen in net purchases per month from April 2023 to January 2024. The start of the easing monetary cycle in the U.S., with the recent 50 basis point cut by the Federal Reserve, could help to unleash new capital from a market whose players are famous for their focus on growth investing strategies. How do you expect foreign investment inflows to evolve over the upcoming year?

Two weeks ago, during my meetings with investors in New York, I noted a sincere optimism regarding investment prospects in Japan. Many have already ramped up their allocations, reflecting growing confidence in Japan’s market potential. While current statistics might not fully capture this shift, it’s evident that Japan is increasingly perceived as a favorable investment destination by American investors.

Yet, a significant issue remains: English disclosure. Many Japanese companies face a language barrier that results in limited communication to foreigners. Still, 98% of Prime-listed companies now have English disclosures, and over 90% have transitioned to offering earnings reports and shareholders’ meeting materials in English.

Every two years, we survey foreign investors on our English disclosure progress. Currently, 75% of investors outside Japan see some improvement in this challenge. However, only about 44% of companies are providing disclosures concurrently in both English and Japanese. Over half the companies lag in releasing dual-language reports. As such, 72% of investors indicate dissatisfaction with the timing of English disclosures, and especially with the level of English disclosure among SMEs.

Consequently, we will mandate simultaneous earnings reports and timely disclosure materials in English and Japanese for Prime-listed companies starting in April next year. This aligns with our guidance during the market segment restructuring: the Prime Market is designated for companies prioritizing global investor engagement. Prime-listed companies were informed from the outset of our commitment to upholding English disclosure standards, and we have no intention of easing these requirements.

For Standard and Growth-listed companies, however, there was no initial English disclosure requirement. Given that we revised listing requirements only two years ago, we recognize the importance of regulatory stability, making further listing changes inadvisable at this time. Nonetheless, foreign investors who believe smaller companies offer substantial, untapped value, would like more access to information on these entities.

To address this, we’ve introduced the JPX Market Explorer, an AI-powered tool that generates 30-second summaries, financial insights, and analyses for nearly all 3,900 listed companies in nine languages. Currently accessible for free on our homepage, this tool enhances information accessibility without altering listing requirements.

Additionally, the JPxData Portal—a specialized AI-based search tool—supports users in locating translated quarterly earnings and corporate governance reports for all listed companies. Though it only offers reference translations, it streamlines access to essential financial documentation.

While we are urging listed companies toward increased English disclosures, we are also enhancing our own resources to facilitate greater transparency and communication with the global investor community.

The Japan Exchange Group was formerly established in January 2013, following the business combination between the Tokyo Stock Exchange Group and Osaka Securities Exchange. Following, the company expanded its offering, acquiring Tokyo Commodity Exchange (TOCOM) in 2019 to expand into commodity derivatives and establishing JPX Market Innovation & Research in 2022. Can you run us through the evolution of JPX since 2013, including the advantages that the acquisition of Tokyo Commodity Exchange and the establishment of JPX Market Innovation & Research brought about?

Following our merger, we established the Tokyo Stock Exchange as a cash equity platform and the Osaka Exchange as a dedicated derivatives market. After acquiring TOCOM, we further specialized by designating TOCOM as our energy derivatives market.

Façade of the Tokyo Stock Exchange

One reasoning behind the establishment of JPX Market Innovation and Research was its status as a non-market operating entity. Following its creation, we executed a strategic minority investment of 20% in Minsetsu, an IR-focused company, and completed a full acquisition of SCRIPTS Asia, a firm specializing in providing Asian investor event coverage with timely English translations of earnings calls and IR meetings within two days. Additionally, we undertook targeted investments in BOOSTRY and Progmat, both prominent entities within the blockchain market.

JPX Market Innovation and Research is currently responsible for JPX's digital, data, and index operations and is actively identifying growth potential within data and index services, as well as exploring new technologies. Although these areas represent a longer-term horizon with few immediate revenue generation, we are committed to sustaining investment in these technologies.

Looking to potential acquisitions, we are always open to new ideas and actively looking for prospective opportunities. However, given the strategic nature of our role and position, we approach such transactions with caution. So we are assessing each opportunity with great care.

JPX’s latest mid-term management plan, dubbed Exchange & Beyond, focuses on 3 key areas: First is to “facilitate the corporate growth and asset formation cycle” through the expansion of the IPO ecosystem, ETFs, and cross-border listing. Second is to drive “Market Transformation” by embracing digitization, and boosting derivative and interest-rate related markets. At last, the plan focuses on “promoting sustainability” through better ESG-related information sharing and ESG calculations. How do you see the progress of this plan relative to those three key axis?

In the first area of our mid-term strategy, we have strategically expanded our product offerings. We now list thirteen actively managed ETFs, raising our total ETF count to 307 (as of November 1^st 2024), up from approximately 270 three years ago at the start of this plan. As we anticipate a more favorable interest rate environment, we’ve added the 3-Month TONA (Tokyo Over Night Average rate) futures to our suite, alongside Nikkei 225 micro futures and mini options. These products, especially the interest rate-linked offerings, have shown strong traction. Japan Securities Clearing Corporation (JSCC), our clearing services, cover listed interest rate-linked products, OTC JGB trading, OTC interest rate swaps (IRS), and other products, with cross-licensing and cross-margining benefiting participants by lowering capital requirements, which we consider substantial progress.

In the second strategic area, although emerging technologies are not yet delivering substantial revenue streams, our focused investments are expected to enhance market presence as they mature.

Our third focus is ESG and sustainability. We launched a carbon credit market last year, where average daily volume is steadily climbing. With 301 participants (as of October 25^th 2024), we are poised to support METI’s anticipated mandate for emission trading from 2026. The government’s carbon neutrality target by 2050 aligns well with our commitment to supporting this essential market.

Revenue-wise, our JPX Market Innovation and Research data service segment has shown promising growth. In 2019, data services represented less than 18% of our total revenue. With a 35% increase in data service revenue against a 24% overall revenue rise, this segment now constitutes 20% of our total revenue. As we conclude this mid-term plan, we are formulating the next, with an emphasis on further bolstering our data service revenue share.

You’ve been a transformative leader in driving corporate reforms in Japan. As you look back at what you have done, is there something you’re particularly proud of, and what do you want to accomplish next?

That’s a challenging question. One of the memorable experiences from the earlier days, when I first joined JPX as the president of the then newly established Osaka Exchange, is when I led a strategic initiative to improve the Osaka office. If you visit Osaka Exchange today, you’ll notice the prominent brand display—a key element we introduced to strengthen visibility. Additionally, on the first floor of the open trading area, a screen now showcases live pricing for indexes and derivatives, creating a dynamic trading environment. It was one of the approaches to visualizing the attractiveness of the Japanese market and foster positive investor sentiment.

Osaka Exchange building

Looking at the future, our vision is to position Japan as Asia’s premier investment hub, both in terms of liquidity and market scale, attracting global investors and inviting IPO candidates from across Asia. Just as the price board display in Osaka shows the active dynamics of the Japanese market, we will have to keep informing the global investment community of the attractiveness of Japan. We aim to establish this market as the go-to venue for capital raising and investment in high-potential vehicles, including Japanese equities and ETFs. While this is an ambitious target and we're not there yet, our ongoing challenge is to stay steadfast in pursuing it. As we reach new milestones, our goal will be to elevate further, so no one can suggest we’ve rested on our achievements. We’ll continue to encourage Japanese-listed companies toward progress, aligning our own advancement with theirs.

For more information about JPX, please visit: https://www.jpx.co.jp/english/ 

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