We do not give corporations the right answer. We only ask, "Have you debated fiercely at the board why your value is not being fairly assessed by the market?"
Met at the Tokyo Stock Exchange (TSE) headquarters in Nihonbashi, Chuo Ward, Tokyo, Listings Department General Manager Watanabe Koji summed up the secret to the success of Japan's value-up approach in one phrase: "pressure without coercion." Rather than acting like a drill sergeant browbeating corporations with specific metrics, he said the exchange focused on building infrastructure that makes companies think for themselves about capital efficiency.
As Japan's largest securities exchange, the TSE designs the market by setting standards for listed companies' entry and exit and for improving governance. In particular, the March 2023 recommendation to the entire Prime and Standard markets to "improve capital efficiency" became a turning point that shook the Japanese stock market to its core.
Going beyond a simple campaign, the project, named "a request for management conscious of the cost of capital and share price," pressed corporations with PBRs below 1 to disclose concrete road maps and timelines to improve capital efficiency, a move widely seen as drawing a line under the chronic undervaluation phase.
This attempt is leading to visible results. As of last year, 91% of companies listed on the TSE Prime market responded to the exchange's value-up request and completed disclosures. The Prime market's average price-to-book ratio (PBR), which was 1.1 times in 2022, rose to 1.4 times, while the long-undervalued Standard market also climbed from 0.7 to 0.9, putting "PBR 1" within reach.
Japan's reform success immediately led to a "surge of Asian funds." Spurred by this, the Taiwan Stock Exchange (TWSE) significantly strengthened its corporate governance guide, and Korea also began developing a "value-up index," igniting a "capital efficiency war" across Asian stock markets.
ChosunBiz met him in Japan on the 19th of this month to hear the specific methodology behind the Tokyo market reforms that ushered in the Nikkei 50,000 era. The following is a Q&A with Listings Department General Manager Watanabe Koji.
— The TSE's March 2023 "request for management conscious of the cost of capital and share price" had considerable ripple effects on the Korean market. What prompted its introduction?
"In fact, since 2015 Japan has urged change in corporations through the Corporate Governance Code. But after a sweeping reorganization of the market structure into Prime, Standard and Growth in 2022, an analysis revealed a major problem. While corporations had completed institutional fixes such as appointing outside directors, core value indicators like return on equity (ROE) and price-to-book ratio (PBR) remained low. Experts said we needed to move beyond formal compliance to a practical execution stage where management allocates resources with an awareness of the cost of capital."
— Specifically, what did you ask corporations to do?
"Align the corporate perspective closely with investor expectations. It is not about simply hitting numbers. We asked management to build a base for medium- to long-term growth by allocating resources appropriately to research and development (R&D), human capital and capital expenditures with an eye to the cost of capital and profitability. To that end, the exchange presented a three-step process: board-level analysis of the current situation, establishment of concrete plans, and execution and continuous updates through constructive dialogue with investors."
— You did not uniformly mandate specific financial metrics or solutions.
"Because there is no single right answer that applies to all listed companies. Each corporation differs in growth stage, industry structure and financial strategy. Some need investment urgently; for others, portfolio realignment may come first. Instead of demanding specific metrics, we offered a framework for thinking. By having corporations analyze themselves, draw up plans and explain them to investors, we sought to form a common language (Common Word) that allows both sides to communicate."
— Some worry this focuses only on short-term returns such as share buybacks or increased dividends.
"That is a misunderstanding. Share buybacks and higher dividends are merely short-term tools. What investors truly expect is management that consistently achieves profitability above the cost of capital and improves the corporate structure. Growth investment comes first, and then, if excess cash exists and buybacks or higher dividends are deemed rational, consider returns as an option. That is our clear message. In fact, an increasing number of cases in which management recognized the cost of capital and share price, improved business portfolios and expanded investment is a tangible achievement of this reform."
— Without legal sanctions, what made Japanese corporations respond so actively?
"Several complex factors were at play. First is Japan's culture that values face. The principles-based "comply or explain" approach proposed by the exchange was especially effective in Japan. In an environment with strong peer comparisons and pressure, the very fact that a company choosing to be passive about value-up would have to publicly explain why became a heavy burden."
Ultimately, as the cost of choosing to be "different" by going against the trend rose, many corporations naturally moved in the same direction. Japanese media also helped create a social climate by highlighting efforts to increase corporate value in a positive light.
More fundamentally, structural changes in Japan's economy are at work. Japan is moving out of a long deflationary phase into an inflationary environment. Accordingly, expanding investment in growth industries and structurally shifting business portfolios has become unavoidable. As corporations now face an environment where mere maintenance is no longer viable, they have no choice but to voluntarily seek growth strategies. This change was the most important driving force behind the reform."
— It seems mid-sized companies with limited human and physical resources may have found it hard to participate in value-up disclosures.
"That is why we worked hard to provide extensive reference materials so corporations could respond according to their circumstances. A prime example is the Good Case Studies compiled by analyzing feedback from more than 400 investors. First released in Feb. 2024, it received a positive response, and in Nov. of the same year we expanded it to 55 cases; in Dec., we added 33 named cases, including 13 from Standard market companies.
We also presented six in-depth cases covering how companies raised awareness of the cost of capital, how they drove behavioral changes in boards and management, and how they used the cost-of-capital concept to improve investment decisions and capital allocation.
At the same time, we presented negative cases as well—materials on "misalignment" between corporate and investor perspectives. By doing so, we made clear what corporations should not do, which drew particular interest from listed companies.
In addition, TSE President Iwanaga Moriyuki personally toured Japan and held briefing sessions for executives of small and mid-sized companies to explain the policy's intent. For corporations unfamiliar even with the concept of the cost of capital, we also continuously provide free online learning materials."
— What allowed the policy to be pursued consistently for more than 10 years, starting with the Abe Cabinet?
"Because every administration since Prime Minister Abe shared the view that growth in the private sector is essential to revitalize Japan's economy. Government policy support continued consistently, and that is the most important reason the value-up policy could proceed without interruption.
The Financial Services Agency (JFSA) designed the broad framework for capital flows, and the Government Pension Investment Fund (GPIF) played the role of a long-term investor. The exchange, for its part, built systems and infrastructure. I believe the strength of Japan's value-up lies in the All Japan setup in which the government, pension fund and exchange are aligned under a single goal of sustainable growth"