The Tokyo Stock Exchange reform, explained

Written 3 September 2026 · All explainers

How to read the markers. [D] — verified from a source retrieved for this note, listed under Sources. [I] — industry-understood; not formally disclosed by a named party. [S] — our own inference or judgment. Every figure is either sourced or marked as an estimate.

The short version

“Japanese governance reform” is not one story. It is a dated sequence of specific instruments, and the one that changed behaviour was a request from the stock exchange, not a law. On 31 March 2023 the Tokyo Stock Exchange (TSE) asked every company on its Prime and Standard markets to work out its cost of capital, compare that with what it actually earns, explain the gap to investors, and publish a plan to close it. The exchange then did something unusual for a request with no legal force: from January 2024 it began publishing, monthly, a list of who had answered. As of the end of July 2026, 94% of Prime companies and 57% of Standard companies are on that list. [D]

The yardstick the market adopted was price-to-book (P/B): the share price divided by the book value of equity per share. A company whose return on equity is below the return investors demand for the risk is worth less than the money already put into it, so the market prices it below book. When the request was issued, about half of Prime companies traded below book. By 1 March 2026 that share was 27%. [D]

Around the exchange sit two government layers. The Ministry of Economy, Trade and Industry (METI) wrote the Guidelines for Corporate Takeovers in August 2023, telling boards how to treat a serious bid, and in July 2026 published a Key Points document and a Q&A restating them. The Financial Services Agency (FSA) rewrote the Stewardship Code (June 2025) and, with the TSE, the Corporate Governance Code (July 2026), and the amended tender-offer law took effect on 1 May 2026. [D]

The pressure is uneven. The request covers all 3,100-odd Prime and Standard companies, but institutional analysts and fund managers stop far up the market-cap list. The TSE’s own data show that companies asking to hear from investors cluster at a market value of “several tens of billions of yen”. Below that, a large tail of companies faces a demand from the exchange with nobody on the other side of the table. [D — TSE; the size of the uncovered tail is our inference, S]

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1. Why price-to-book became the yardstick

Three terms, defined once.

Book value is the accounting value of shareholders’ equity: what shareholders have put into the company plus the profits it has kept. Return on equity (ROE) is this year’s profit divided by that book value — the rate the company earns on the money it holds. Cost of equity is the return shareholders require for bearing the risk of owning the shares; in Japan the TSE has used 8% as a rough benchmark for years. [D — the 8% figure appears in the TSE’s March 2023 request]

The link between the three is one line. If a company earns a steady ROE on its book value B and pays it all out, its equity is worth E = ROE × B ÷ r, where r is the cost of equity. Divide both sides by B:

P/B = ROE ÷ cost of equity (steady state, no growth). [I]

So a company earning exactly its cost of equity is worth exactly its book (P/B = 1). One earning less is worth less than the money already inside it: a P/B of 0.6 says the market would rather have 60 yen in cash than 100 yen of this company’s equity. With growth the formula becomes (ROE − g) ÷ (r − g), which moves the number but not the threshold: P/B crosses 1 exactly where ROE crosses the cost of equity.

That is why the TSE could use one public number to say something about a private one. Its March 2023 request states that “approximately half of the listed companies on the Prime Market and 60% in the Standard Market have ROE below 8% and P/B ratios below 1”, and that “a PBR below 1 is one indication that the company has not achieved profitability that exceeds its cost of capital, or that investors are not seeing enough growth potential.” The request never made “reach P/B 1” a rule; it asked companies to explain the gap and set their own targets. Disclosure of the cost of capital itself “is not necessarily required”. [D]

The so-what: P/B below 1 is the visible symptom, and ROE below cost of equity is the disease. Buying back shares raises ROE by shrinking the denominator, which is why buybacks are the fastest response — and why the TSE has repeatedly said it does not want “a one-off response”. [D]

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2. The instruments, in order

Two things to notice. First, the exchange has revised the request itself only once (April 2026), but it has changed the list three times: January 2025 added a six-month limit on “under consideration” status and a column for companies that want institutional investors to contact them; January 2026 added each company’s disclosed text. Second, none of the METI documents is a rule. The 30 July 2026 Key Points opens by stating that the 2023 Guidelines “remain valid” and that the new documents proceed “on the firm premise that the Guidelines are maintained and not revised”. [D]

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3. The list: what “disclosed” means and what it does not

The mechanism is simple. Every listed company files a corporate-governance report with the exchange. Since 2024 that report has a section headed “Action to Implement Management That Is Conscious of Cost of Capital and Stock Price”, in which the company ticks one of three boxes: initial disclosure, updated disclosure, or “consideration status”. The first two put it on the list as “Disclosed”; the third puts it on as “Under Consideration”, but since January 2025 only for six months, after which it is classed as undisclosed. The exchange compiles the list at each month-end and publishes it around the 15th of the next month. [D]

The exchange’s own commentary is more measured than the headline. Its January 2026 policy paper says: “While the disclosure rate in the Prime Market is over 90%, among companies that have disclosed, only some are moving” beyond the initial filing. The April 2026 paper reports that 71% of Prime companies and 25% of Standard companies had updated their disclosure at least once, and describes the roughly 121 Prime holdouts as companies that mostly “deliberately chose not to disclose”, while the roughly 780 Standard holdouts are attributed to “insufficient resources and know-how”. [D]

The so-what: “disclosed” is a tick in a filing, and the TSE says so. What it measures is whether a board has been made to discuss cost of capital at all — which, in 2023, was the actual gap.

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4. Where the pressure lands

The request covers the whole of two market segments. JPX’s count on 2 September 2026 was 1,549 Prime companies, 1,557 Standard, 598 Growth and 187 on the TOKYO PRO Market — 3,891 in total, of which 3,106 are under the request. [D]

How many are below book? The TSE’s April 2026 paper gives the distribution at two dates. On 1 July 2022, 50% of Prime companies (922) and 64% of Standard companies (934) had a P/B below 1. On 1 March 2026 the figures were 27% (424) and 49% (766). ROE moved much less: the share of Prime companies with ROE below 8% fell from 47% to 43%, and Standard from 63% to 60%. [D] So a large part of the P/B improvement is a re-rating of shares, not an improvement in earning power — which the TSE itself noted as early as November 2024. [D — Dai-ichi Life Research Institute summarising TSE]

Now the coverage gap. The Prime concept is written around institutional investors; the Standard concept is not. One industry figure puts a number on what that means in practice: Eastspring, using IFIS and MSCI data as of 1 April 2022, found that under-covered small caps made up “almost 57%” of the TOPIX index by count. [D — an asset manager’s estimate, not an exchange statistic] That coverage thins with size is not disputed by anyone in the trade; the exact share is. [I] The exchange’s own data point is indirect but telling: 348 companies had asked, by end-July 2026, to be flagged on the list as wanting “more active contact from institutional investors”, and the TSE describes the “volume zone” of those companies as a market value of “several tens of billions of yen” — 270 of them on Prime (17% of the segment), only 78 on Standard (5%). [D]

Put those together and the shape is clear. A Standard-market company with a market value of ¥15bn and no analyst is under exactly the same request as Toyota. The exchange can name it; it cannot make anyone read the filing. The TSE’s April 2026 paper concedes the point for Standard, where it says half the segment has “yet to begin”. [D] How many Prime and Standard companies in total have no institutional holder engaging with them is not a published number. [S]

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5. The second engine: unwinding cross-shareholdings

A cross-shareholding is a stake one listed company holds in another “for reasons other than pure investment purposes, for example, to strengthen business relationships” — the Corporate Governance Code’s own definition, which covers one-way holdings as well as mutual ones. [D] Historically these blocks voted with management, which is why a bidder or an activist could win the argument and still lose the vote.

The Code’s Principle 1.4 requires companies to disclose their policy on such holdings “including their policies regarding the reduction of cross-shareholdings”, to have the board “annually assess whether or not to hold each individual cross-shareholding” against the cost of capital, and not to “hinder the sale” when the other side wants out. The 2026 revision keeps all of that. [D] Large investors have made it a voting matter: a common guideline votes against top management when cross-holdings exceed 10% or 20% of net assets. [D — T. Rowe Price, January 2025]

The sellers that matter most announced programmes with dates:

The trigger for the insurers was not governance theory. In February 2024 the FSA told the four to accelerate disposals — roughly ¥6.5tn across some 5,900 companies — after a price-fixing scandal in which the FSA said cross-holdings had “been part of the cause”. [D — Bloomberg Law, citing Nikkei] A single 2024 block sale shows the scale: ten financial institutions sold ¥535bn of Honda in one placement in July 2024. [D]

Why a foreign investor cares: every block that moves from an insurer or bank to the open market is a block that will now vote on price. The “stable shareholder” wall that defeated bids in the 2000s is being dismantled by its own builders, on published timetables.

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6. What the toolkit looks like

None of this tells an investor what to do. It does define the instruments available and what each now has behind it.

Engagement. The revised Stewardship Code treats collaborative engagement as “an important option” rather than something that “may be beneficial”, and the FIEA amendments effective May 2026 clarify when co-operating investors count as joint holders for disclosure. [D — AMT; ACGA] The TSE’s list now contains the 348 companies that have asked to be approached.

Shareholder proposals. The June AGM season has set records for four years. In the year to June 2024, 109 companies received 453 proposals (Diligent data, via Sodali). In June 2025, proposals were filed at 113 companies, 52 of them by activists (Mizuho Trust, via TMI), and 14 proposals at seven companies passed. For June 2026, Reuters reported a record 139 proposals from investors, 19 of them on executive appointments (Mitsubishi UFJ Trust, via SquareWell). [D] Approval remains “extremely rare”: fewer than one in twenty since January 2023, on SquareWell’s count. [D]

Tender offers. Since 1 May 2026 any purchase taking a holder past 30% of voting rights must go through a tender offer, down from one-third. Unsolicited tender offers rose from four in 2024 to seven in 2025; Japanese M&A hit 5,115 deals and ¥35.7tn in 2025 on Recof data. [D — Mori Hamada & Matsumoto via Law.asia]

The board’s obligations when a bid arrives. METI’s Key Points (30 July 2026) restate the 2023 code: a “bona fide offer” — specific, purposeful and feasible — must receive “sincere consideration”; the board is expected to have a plan of its own to compare it against; a special committee is the expected vehicle; and an offer “is not considered as a ‘Desirable Acquisition’ solely because of a high purchase price”. Corporate value is defined as “the sum of the present values of discounted future cash flows” — a number, not a slogan. [D] The same document reminds boards that the principle of shareholders’ intent applies to control: it is the shareholders’ decision. [D]

That is the whole architecture: the exchange names, the Code obliges, the statute forces the bid into the open, and the sellers of the old defensive blocks have published their exit dates.

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Caveats

• Every disclosure and P/B figure is a point-in-time count from a named TSE paper. They move monthly; the end-July 2026 disclosure figures (14 August 2026 paper) are the latest retrieved. The 1 March 2026 P/B figures are the latest exchange figures found; no later exchange count was retrieved.
• The brief for this piece expected a METI publication “effective around 1 August 2026”. What METI published is the Interpretation, Key Points and Q&A dated 30 July 2026. They are explanatory documents with no effective date, and METI states the underlying Guidelines are unchanged.
• The 57% coverage figure comes from an asset manager’s marketing material, on 2022 data. A second, later industry figure was found in search results but its page no longer loads, so it is not used. No exchange or regulator statistic on analyst coverage was found. The shaded boundary in Figure 2 is illustrative.
• Shareholder-proposal counts differ by compiler (Diligent, Mizuho Trust, Mitsubishi UFJ Trust) and by base (companies versus proposals, all shareholders versus activists only, June season versus twelve months). The table reports each on its own base and does not chain them into a single series.
• The ¥3tn Toyota figure is a Reuters sources-based report relayed by a secondary site; Toyota has not been retrieved confirming it. The combined megabank figure comes from a Nikkei Asia page whose displayed date (1 April 2026) may be a re-publication date.
• “P/B = ROE ÷ cost of equity” is the no-growth steady state. Real P/B depends on expected growth, payout and accounting book values; the threshold argument holds, the arithmetic is a simplification.
• The 2022 segment counts at restructuring are not given here because the JPX page carrying them did not load this session; the TSE’s own January 2026 paper gives 3,770 companies on 1 April 2022 and 3,782 on 31 December 2025.

Sources [D]

All retrieved and confirmed to load on 3 September 2026.

Tokyo Stock Exchange / JPX

• Action to Implement Management that is Conscious of Cost of Capital and Stock Price (Prime and Standard Markets) — JPX, updated 14 Aug 2026 — the request date, the list mechanism and its January 2025 and January 2026 revisions, the six-month “under consideration” limit, the three editions of Key Points and Examples, the August 2026 surveys.
• Action to Implement Management that is Conscious of Cost of Capital and Stock Price — TSE, 31 Mar 2023 (PDF) — the original request: “approximately half … and 60%” below 8% ROE and P/B 1; “a PBR below 1 is one indication”; cost-of-capital disclosure “not necessarily required”.
• Status of Disclosure (as of the end of July 2026) — TSE Listing Department, 14 Aug 2026 (PDF) — 94% / 57%; 1,269 and 524 updates; 348 companies wanting investor contact and their size distribution.
• Initiatives for Fourth Year of Management That Is Conscious of Cost of Capital and Stock Price — TSE, 7 Apr 2026 (PDF) — end-Feb 2026 disclosure counts; P/B and ROE distributions at 1 July 2022 and 1 March 2026; characterisation of non-disclosers.
• Update to the Request Concerning Management That is Conscious of Cost of Capital and Stock Price — TSE, 28 Apr 2026 (PDF) and its news release — the four key questions; growth investment before returns; sale of cross-shareholdings as a capital source.
• 2026 Policies and Initiatives — TSE Listing Department, 14 Jan 2026 (PDF) — “only some are moving”; 161 companies in improvement periods at end-November 2025; 3,770 companies on 1 April 2022.
• Future Initiatives Regarding “Action to Implement Management…” — TSE, 30 Aug 2024 — 86% / 44% at end-July 2024.
• TSE Has Published a List of Companies That Have Disclosed Information — 15 Jan 2024 — first list; keyword mechanism; monthly update by around the 15th.
• Revision of the List of Companies That Have Disclosed Information — TSE, 26 Sep 2025 — adding disclosed text from January 2026.
• Expiration of Transitional Measures Regarding Continued Listing Criteria — JPX, updated 21 Jan 2026 — regular criteria from record dates on or after 1 March 2025; improvement period and delisting sequence; the Prime criteria.
• Overview of Market Restructuring — JPX — 4 April 2022; the Prime, Standard and Growth concepts.
• Number of Listed Companies — JPX, 2 Sep 2026 — 1,549 / 1,557 / 598 / 187 / 3,891.
• Information Disclosure Regarding TSE’s Request — QUICK, 18 Jan 2024 — end-December 2023 counts by market.
• TSE Initiatives Requiring Management Awareness of Capital Costs and Stock Price — Dai-ichi Life Research Institute, Nov 2024 — P/B improvement “partly due to the overall rise in stock prices”; ROE “has not improved as much”.

METI

• METI Formulates Guidelines for Corporate Takeovers — 31 Aug 2023 — the three principles and chapter structure.
• METI Formulates Key Points and Q&A on the Guidelines for Corporate Takeovers — 30 Jul 2026 — the three new documents; comment period 18 June–17 July 2026, 59 responses; Guidelines “maintained without revision”.
• Key Points of the Guidelines for Corporate Takeovers — METI, 30 Jul 2026 (reference translation, PDF) — “remain valid”; bona fide offer and sincere consideration; special committee; corporate value as discounted cash flows; “not … solely because of a high purchase price”.

FSA

• Finalization of the Corporate Governance Code (2026 Revision) — FSA and TSE, 21 Jul 2026 — consultation 10 April–15 May 2026, 147 comments.
• Japan’s Corporate Governance Code (2026 Revision) — 21 Jul 2026 (PDF) — Principle 1.4 text and footnote definition of cross-shareholdings; the “path for growth” principle; annual-securities-report timing.
• The Revised Corporate Governance Code to Promote Growth Investments — FSA/TSE, 21 Jul 2026 (PDF) and Overview of 2026 revisions (PDF) — key revisions.
• Initiatives for Corporate Governance Reform — FSA — titles and dates of the 2023, 2024 and 2025 Action Programs.
• Finalisation of Japan’s Stewardship Code (Third revision) — FSA, 26 Jun 2025 — date; signatories to update within six months.
• Overview of the Proposed Revisions to the Stewardship Code — Anderson Mori & Tomotsune, 21 Mar 2025 — collaborative engagement as “an important option” (draft stage).
• Decoding Japan’s New Stewardship Code and 2025 FSA Action Programme — ACGA, 23 Jul 2025 — FIEA amendments effective May 2026 on joint holders; the 2025 programme’s stance on strategic shareholdings.

Takeover law and M&A activity

• Overview of recent trends in Japan’s M&A market — Takao Kitano, Mori Hamada & Matsumoto, Law.asia, 4 Aug 2026 — tender-offer threshold from one-third to 30%, in effect 1 May 2026; unsolicited tender offers four (2024) to seven (2025); 5,115 deals and ¥35.7tn in 2025 (Recof).

Cross-shareholdings

• Japan FSA Seeks Faster Stock Unwinding by Insurers — Bloomberg Law citing Nikkei, 9 Feb 2024 — the FSA request; ¥6.5tn across ~5,900 companies; “part of the cause of recent scandals”.
• Japan’s Non-Life Insurers Must Cut Cross-Shareholdings to Zero, Industry Group Says — Insurance Journal, 19 Sep 2024 and the same Reuters report via MarketScreener — the four insurers; zero target; ban on new holdings.
• Japan’s Big Non-Life Insurers Plan to Sell Cross Shareholdings — Insurance Journal citing Bloomberg, 20 May 2025 — ¥600bn / ¥573bn / ¥200bn.
• Japanese insurers, banks to sell Honda shares worth $3.3 bln — Reuters via MarketScreener, 4 Jul 2024 — ¥535bn; ten institutions.
• Corporate Governance Report — Mitsubishi UFJ Financial Group, last updated 1 Jul 2026 (PDF) — ¥700bn FY2024–FY2026; under 20% of consolidated net assets.
• Japan’s top banks aim to unwind $6bn in cross-held shares in 3 years — Nikkei Asia — “more than 1 trillion yen … over the next three years”.
• Notice Concerning Sale of Cross-Shareholdings — Toyota Industries, 31 Oct 2024 — 184,897,656 Denso shares, December 2024 to March 2027; ¥300.9bn sold in the prior year.
• Toyota plans around $19 billion share sale by financial institutions, sources say — Reuters, relayed by reutersbest.com, 26 Feb 2026 — secondary relay; see Caveats.
• How investors are tracking progress on Japan’s efforts to unwind cross-shareholdings — T. Rowe Price, Jan 2025 — voting guidelines at 10% or 20% of net assets; 72% / 30% disclosure at end-May 2024.
• Japanese insurers court foreign investors to replace cross-shareholdings — Nikkei Asia, 19 Aug 2026 — Capital Group’s 9% of MS&AD; Berkshire in Tokio Marine (context only).

Shareholder proposals and coverage

• 2024 Japan AGM Review Focusing on Shareholder Proposals — Sodali & Co (PDF) — 109 companies, 453 resolutions, July 2023–June 2024, Diligent data.
• Trends in Shareholder Proposals in Japan — TMI Associates, Sep 2025 (PDF) — 113 companies in June 2025, 52 by activists, 91 in June 2024 (Mizuho Trust); 140 activist proposals, 70 on articles; 14 passed at seven companies.
• Japan firms face record activist shareholder proposals — Reuters via MarketScreener, 19 Jun 2025 — 52 companies versus 46 in 2024 (Mitsubishi UFJ Trust).
• Japanese Firms Field Record Proposals From Activists — SquareWell Partners, 8 Jun 2026 — 139 proposals, 19 on executive appointments (Reuters, Mitsubishi UFJ Trust); fewer than one in twenty passed since January 2023.
• Japan’s small and mid-caps: an overlooked opportunity — Eastspring, Apr 2024 — “almost 57%” under-covered, IFIS/MSCI data at 1 April 2022.
• This Time Is Different: Japan Value and Corporate Governance — Man Group, 13 Mar 2023 — 48% of Prime with ROE below 8% and about half of TOPIX below book in February 2023 (Daiwa), corroborating the TSE’s opening figures.
• Tokyo Stock Exchange Initiative on Cost of Capital and Stock Price Conscious Management — Harvard Law School Forum on Corporate Governance, 21 Oct 2025 — investors’ view that many disclosures are “perfunctory”.