Japan's Corporate Governance Reforms and the Rise of Block Trades: A Catalyst for Institutional and Retail Investment

Japan's corporate governance reforms, initiated in 2023 and accelerated through 2025, have catalyzed a structural transformation in its equity market, reshaping capital flows and unlocking value for both institutional and retail investors. These reforms, driven by the Tokyo Stock Exchange (TSE) and supported by government policy, have addressed long-standing issues of poor capital allocation, opaque governance, and underwhelming shareholder returns. The result is a market increasingly attractive to global capital, evidenced by surging block trade activity, rising equity valuations, and a shift in investor behavior toward performance-driven corporate practices.

Corporate Governance Reforms and Their Impact

The cornerstone of Japan's reforms has been the TSE's push for stricter disclosure rules and higher governance standards. By 2025, 49% of companies in the TSE's Prime section had disclosed capital efficiency measures, a direct response to the exchange's "name and shame" campaign, which pressures firms to improve governance or risk exclusion from key indices like the TOPIX. These measures include reducing cross-shareholdings, increasing board independence, and prioritizing shareholder returns through dividends and buybacks. For instance, major insurers such as MS&AD and Tokio Marine pledged to sell cross-held shares within six years, with proceeds funneled into buybacks or dividends.

The reforms have also spurred a cultural shift in corporate Japan. Shareholder support for executives delivering returns on equity (ROE) below 5% has plummeted, forcing management teams to enhance profitability. Large-cap firms like Hitachi and JSR have streamlined operations by divesting non-core assets, while smaller companies are following suit. According to a report by JPMorgan, cumulative earnings per share (EPS) growth for Japanese equities reached 250% over the past decade, despite the market trading at a steep discount on price-to-book ratios. This earnings momentum, coupled with improved transparency, has attracted activist investors and private equity firms, which now manage an estimated JPY890 billion in Japanese equities.

The Rise of Block Trade Activity

The structural improvements in governance have directly influenced block trade dynamics. Share buybacks in Japan exceeded JPY10 trillion in fiscal year 2024 and hit JPY6 trillion in the first two months of 2025, while dividends surged from JPY2 trillion to JPY16 trillion over the same period. These figures reflect a market increasingly focused on returning capital to shareholders, a shift that has made Japanese equities a magnet for institutional capital.

Block trade volumes have also been bolstered by the unwinding of cross-shareholdings. For example, the dissolution of cross-shareholdings by major insurers has generated liquidity that firms are channeling into buybacks, stabilizing stock prices during market downturns. Additionally, the TSE's requirement for simultaneous English and Japanese disclosures has reduced barriers for foreign investors, with 32% of Japanese equities now owned by foreign entities. This influx of capital has been further amplified by the Bank of Japan's policy normalization and rising interest rates, which have incentivized households to shift savings from cash into equities.

Institutional and Retail Investor Behavior

Institutional investors have been pivotal in driving these changes. Asset managers like PGIM and Amova have praised Japan's reforms for aligning corporate reporting with international standards, making the market more accessible to global funds. Meanwhile, the government's Doubling Asset-based Income Plan has encouraged retail investors to participate in the market, with households reallocating capital from low-yield bank deposits to equities amid inflationary pressures.

Retail investor confidence has also been bolstered by case studies of successful governance-driven value creation. For instance, Mitsubishi Shokuhin's restructuring-marked-by improved dividend policies and operational efficiency-culminated in a premium buyout offer by Mitsubishi Corp, illustrating the tangible benefits of governance reforms. Such examples have reinforced the narrative that Japan's corporate transformation is not merely cyclical but structural, attracting both long-term institutional capital and retail participation.

Conclusion

Japan's corporate governance reforms have created a virtuous cycle: improved governance has enhanced shareholder returns, which in turn have attracted capital inflows and elevated equity valuations. The surge in block trade activity, driven by buybacks, dividends, and the unwinding of cross-shareholdings, underscores the market's shift toward performance-driven corporate behavior. For investors, the key lies in identifying firms with proactive management teams and governance practices aligned with investor expectations. As Japan exits its deflationary past and embraces a more dynamic corporate culture, its equities are poised to deliver sustained value-a compelling proposition in an era of global capital reallocation.