Japan Corporate Governance Reform Doubles ROE, Says Schroder Japan Trust Manager

Japan’s corporate governance reform has roughly doubled the average return on equity for Japanese companies over the past decade, according to Masaki Taketsume, manager of the Schroder Japan Trust (SJG), speaking on the MoneyWeek Talks podcast. The structural shift, years in the making, is now being reinforced by a new wave of regulatory pressure that keeps the reform story very much alive.

From Abenomics to a Structural Tailwind

The proximate trigger for Japan’s escape from deflation was the surge in import costs in 2022, which pushed firms to raise prices. That pricing power fed into earnings growth, which in turn drove wage rises, consumption and further earnings gains. But the deeper foundations were laid earlier, under Shinzo Abe’s return to office in 2012.

Abe’s so-called ‘three arrows’ combined fiscal stimulus, accommodative monetary policy and structural deregulation. Taketsume describes the objective plainly: ‘The combination helped the Japanese economy to improve, narrowing the gap between supply and demand.’ The third arrow, deregulation, is where corporate governance reform sits, and it has had the most durable market consequences.

Japan introduced a Stewardship Code in 2014 and a Corporate Governance Code in 2015. The governance code required listed companies to appoint at least two independent outside directors, and sales of cross-shareholdings accelerated sharply after it came into effect. In 2022, the Tokyo Stock Exchange restructured its market into three tiers (Prime, Standard and Growth) and required companies, particularly those trading below book value, to set out concrete plans to improve their cost of capital.

The results in return-on-equity terms have been clear. Taketsume said: ‘If we move back to before the Abenomics era, average return on equity for the Japanese corporation was something like 4% or 5%, but now, thanks to the corporate governance reform, the Japanese company is getting closer to 9% or 10%.’ That doubling has taken a little over a decade. The MSCI Japan Index recorded an ROE of 9.9% at end-2022, against 14.7% for the MSCI World Index, which frames the gap that still needs to close.

Japan Corporate Governance Reform and the Cross-Shareholding Unwind

The unwinding of cross-shareholdings, the interlocking equity stakes that insulated Japanese management from shareholder pressure for decades, is one of the most concrete expressions of reform. According to AllianceBernstein, cross-shareholdings have fallen from over 60% of total market ownership in 1990 to around 25% at end-2023, with foreign investors now holding 32% of total ownership.

Taketsume points to Toyota as an illustration: ‘Toyota Group used to have a reputation of having a very strong tie between Toyota and the supplier, but nowadays most of the Toyota group [has dissolved] their cross-shareholding.’ The wider picture bears that out. In late 2023, Toyota announced reductions in major cross-shareholdings including stakes in Denso and KDDI. Nintendo has also moved to unwind similar stakes, and Reuters reported a record number of activist campaigns in the year prior to March 2026, according to Jefferies data, adding further momentum.

The pressure is not only coming from activists. In 2023, the Tokyo Stock Exchange noted that around half of Japan’s listed companies were trading below book value and carried ROEs under 8%, according to Amundi Research. That public naming has concentrated minds at boards that previously considered shareholder returns an afterthought.

Reform Still Has Further to Run

Taketsume’s argument is that corporate governance reform remains a structural positive for Japanese equities precisely because the process is unfinished. ‘Corporate governance reform is an ongoing effort, so that suggests we may see further upside in the return on equity for the Japanese company and move closer to that of the US or Europe,’ he said.

The regulatory pipeline supports that view. In spring 2026, three parallel public consultations are under way: the Ministry of Justice on Companies Act amendments, Japan’s Financial Services Agency on revisions to the Corporate Governance Code, and the Tokyo Stock Exchange on listing rules for minority shareholder protection, according to the Asian Corporate Governance Association. Separately, a planned revision to the TOPIX index methodology is set to roll out over two years from October 2026, introducing tighter listing and continuation requirements and an annual review of constituents, as Asset Value Investors has noted.

Schroder Japan Trust, listed on the London Stock Exchange under the ticker SJG, had a net asset value of £399.08m as at 31 January 2026, according to Schroders. The trust aims to pay a dividend equivalent to 4% of net asset value annually and benchmarks itself against the TOPIX TR JPY (GBP). For investors watching the governance reform thesis, the October 2026 TOPIX restructure is the next concrete test of whether Tokyo is willing to enforce the standards it has spent a decade writing.