From Decline to Resurgence: The Nikkei 225’s Remarkable Comeback
For nearly two decades, Japan’s stock market struggled, leaving investors disheartened. But from 2009 to 2024, the Nikkei 225 Index experienced an astonishing fourfold increase in value. What changed? We explored this turnaround by interviewing over 100 Japanese business leaders between 2019 and 2023, uncovering a new leadership model we call “Resolute Japan.”
The Resolute Japan Model: Blending Tradition and Innovation
Japanese companies are shifting towards a new governance model that combines traditional practices with modern strategies. This approach, which we describe as a “halfway-pendulum” method, allows firms to adapt beneficial aspects from global practices while retaining their cultural identity. Instead of fully adopting Western business norms, Japanese companies have carefully integrated these ideas into their unique management styles.
Stakeholder Priorities: A Cultural Shift in Perspective
Historically, Japanese executives have emphasized the importance of all stakeholders over shareholders. A study from the mid-1990s showed that 97% of Japanese executives believed their companies existed to benefit all stakeholders, while only 75% of U.S. executives prioritized shareholder interests. When faced with tough decisions, like choosing between paying dividends or retaining employees, Japanese leaders overwhelmingly chose to keep their teams.
Fast forward to today, the contrast remains stark. In 2022, U.S. companies averaged 83% of their net income going to dividends and share buybacks, while Japanese companies allocated just 29%. Yet, a unique Japanese tradition allows companies to give “special gifts” to shareholders, softening the perceived gap in prioritization.
Global Influences and Local Adaptations
Japan’s journey toward a more shareholder-friendly environment has not been without challenges. The Asian Corporate Governance Association called for better shareholder returns in 2008, urging companies to balance stakeholder governance with shareholder rights. Responding to this call, major Japanese entities like the Tokyo Stock Exchange and the Japan Business Federation (Keidanren) began advocating for governance reforms while leaving specific changes to companies themselves.
In 2015, the Financial Services Agency issued a significant corporate governance code encouraging companies to shift their focus outward, toward shareholders. This led to a dramatic rise in independent directors on Japanese boards, from 32% in 2010 to nearly 100% in 2019.
The Impact of Changes: Mixed Results
Despite these reforms, the actual impact on financial performance has been mixed. While some studies indicate that independent directors can lead to improved corporate performance, others have not found any significant changes. Still, there are signs of progress: the ratio of dividends to shareholder equity among large Japanese firms rose from 1.9% in 2012 to 2.4% in 2017.
Business leaders express skepticism about the effectiveness of these governance changes. Many executives believe that while improvements have been made, traditional management styles still dominate. As Shinichiro Ito, chairman of ANA Holdings, pointed out, despite better planning and transparency, tangible benefits from governance reforms remain elusive.
Who Are the True Stakeholders?
When asked about the most significant stakeholders, only 2% of Japanese executives identified shareholders as their top priority. Most respondents viewed all stakeholders—employees, customers, and society—as equally important. This reflects a deep-seated belief in Japan’s unique business culture, which prioritizes collective well-being over individual financial gain.
As companies gradually shift toward a more balanced approach, it’s clear that while shareholder interests are gaining traction, traditional values remain influential. For instance, Asahi Breweries emphasizes the importance of all stakeholders, placing customers and employees above shareholders.
Bridging the Gap: A New Way Forward
The “halfway-pendulum” model has enabled Japan to incorporate investor concerns without sacrificing its core values. Kentaro Kawabe, CEO of Z Holdings, advocates for engaging with investors and considering their insights. By recognizing the expertise that global analysts bring, Japanese firms can refine their strategies while remaining rooted in their cultural ethos.
In conclusion, Japan’s stock market resurgence reflects a nuanced transformation in corporate governance. By blending traditional values with modern practices, Japanese companies are navigating the complexities of stakeholder capitalism, paving the way for a more balanced and resilient economic future.
I am Aparna Sahu
Investment Specialist and Financial Writer
With 2 years of experience in the financial sector, Aparna brings a wealth of knowledge and insight to Investor Welcome. As an accomplished author and investment specialist, Aparna has a passion for demystifying complex financial concepts and empowering investors with actionable strategies. She has been featured in relevant publications, if any, and is dedicated to providing clear, evidence-based analysis that helps clients make informed investment decisions. Aparna holds a relevant degree or certification and is committed to staying ahead of market trends to deliver the most up-to-date advice.
