JAPAN ACTIVIST INSIGHTS

January 2023

Japan’s Corporate Governance Updates: 2022-2023
Japan Catalyst Inc. (JCI) employs an engagement investment strategy towards Japanese companies throughthe Japan Catalyst Fund (Cayman domiciled, launched in 2021) and the Monex Activist Mother Fund
(Japan domiciled, launched in 2020), for which JCI provides investment advice.
We strongly believe that improving corporate strategy and corporate governance of Japanese listedcompanies will be a crucial factor in revitalizing the Japanese economy. Through our engagement strategy,
we have actively sought to improve the corporate strategy of Japanese companies, as demonstrated by ourinvestments in JAFCO and SEPTENI. As we begin 2023, we are pleased to present our latest reportdetailing the key developments in Japan’s corporate governance landscape for 2022 and providing an
outlook for 2023. Our report also highlights a specific engagement theme that we believe holds great
potential for the Japanese capital markets and our investment strategy in 2023.

Key Takeaways• Rising shareholder activism and governance reforms in Japan are exerting unprecedented pressure oncompanies to improve capital efficiency and enhance corporate value, providing ample opportunities
for engagement strategies.
• In 2023, the Tokyo Stock Exchange plans to further strengthen its reforms, with a specific emphasis on
addressing capital inefficiencies and increasing market capitalization per company.
• Misallocation of resources, rather than an absence of resources, is a significant factor in the low
productivity of Japanese firms. The “reallocation of production factors” with the aim of enhancing
capital productivity and corporate value will be a central theme in the Japanese markets and for our
engagement strategy in 2023 and beyond.

Overview➢ Growing Momentum for Activism: Shareholder activism has continued to gather momentum in Japanas corporate governance reforms progress further. A series of developments in the governance andstewardship regime led by The Tokyo Stock Exchange (TSE) through 2021-2022 have shed light oninefficiently managed companies and have begun to shift the mindset and behavior of not only
corporate leaders, but also domestic institutional investors, to be more proactive in advocating for
improved governance practices.
➢ Further Governance Reforms Ahead: The TSE is posed to further strengthen its reforms in 2023.
Following the rollout of its new market structure in April 2022, the TSE formed a “follow-up council”
of experts, in which Oki Matsumoto is one of nine members, to discuss additional measures that canfundamentally enhance the mid/long-term corporate value of listed companies. With half of thecompanies trading at a price-to-book ratio below 1, the primary focus of Japanese regulators is toaddress capital inefficiencies and improve financial indicators such as PBR and ROE - companies thatpersistently generate low returns on capital and trade low PBR multiples will come under increasing
scrutiny.
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Overview➢ Greater Opportunities for Engagement: As shareholder activism becomes more prevalent andgovernance reforms continue to make substantial progress, Japanese top management are facing
unprecedented pressure from shareholders and regulators to improve capital efficiency and enhanceshareholder value. This trend has created more opportunities for engagement strategies, as there arestill relatively few companies that have a CEO or outside directors with strong expertise in finance andcapital markets. Many corporate leaders are in great need of the assistance of a trusted partner inmoving away from legacy models with lazy balance sheets and transforming their business and capital
structure. Indeed, we have been approached by several CEOs and directors seeking our strategic advice
on their capital policy through recommendations from CEOs of our core holdings.
➢ Enhancing Productivity and Corporate Value through Resource Realignment: With many
Japanese industries experiencing a 30-year high corporate margin, we see an abundance of companies
that have competitive operations, ample resources, and upward growth potential, yet whose stock isundervalued due to various factors, including inefficient capital structure and suboptimal businessportfolio. While Japan’s low economic growth is often attributed to the low labor productivity ofJapanese companies, we often observe exceptional productivity in core businesses or on the front line.
In our view, the productivity of Japanese companies lags behind that of other developed peers, owning
to a misallocation of resources, rather than an absence of resources. Therefore, by effectively
reallocating or consolidating misplaced production factors, including goods, capital, and humanresources, among companies, their capital efficiency and productivity will be improved, thus
enhancing Japanese firms’ corporate value and competitiveness. With the Japanese authorities also
recognizing this issue, we believe that this concept of the “reallocation of production factors” between
Japanese companies, as well as between Japanese and overseas companies, will be a vital theme in theJapanese capital markets and for our engagement strategy for the current and upcoming years.
➢ As a Domestic Constructivist: Our strategy is to actively engage with companies that have a solid andcompetitive core business but suffer from adequate governance, and are willing or prepared to undergochange. We aim to lead the transformation of our target companies through constructive dialogue.
Since our launch, leveraging Oki Matsumoto’s unparalleled network and the team’s distinguishedfinancial expertise, we have unlocked engagement opportunities that no other player has ever been able
to. On January 4th, 2023, Oki Matsumoto stepped down as Chairman of Monex, Inc, a core subsidiaryof Monex Group, with the sole intention of focusing more on his engagement activities with listedcompanies as Chairman of Japan Catalyst. With his increased dedication to engagement and our
distinct positioning as a constructive domestic activist, we are confident that we will continue touncover more actionable opportunities and unlock value for our portfolio companies throughout 2023.

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JAPAN ACTIVIST INSIGHTSKey Developments in Japan’s Corporate GovernanceMarket Restructuring by the Tokyo Stock Exchange➢ Stricter listing criteria implemented: With the aim of enhancing the attractiveness of its primarymarket, the TSE introduced a new market structure in April 2022, under which firms listed on its new
top-tier “Prime Market” are required to meet higher liquidity standards and adhere to the 83 principles ofcorporate governance code. The new framework expects prime listed companies to have higher standardsof governance and a commitment to medium/long-term corporate value creation with a focus on
constructive dialogue with global investors. With the implementation of more stringent listing rules,
1,837 companies, comprising 84% of the former 1st section, have chosen to be listed on the Prime
Market.
Highlights of TSE’s Market Restructuring

AgendaSimpler Market
Segmentation

Liquidity

Stricter
Listing
Criteria
for
PrimeMarketGovernanceBusiness
Performance

ChangesResults✓

The stock market was restructured into three
new market segments: Prime, Standard, and
Growth

✓1,837 companies (84% of 1st
section listed) selected Prime
Market✓✓✓✓No. of Shareholders: At least 800
Tradable Share Units: At least 20,000 units
Tradable Share Market Cap: At least JPY 10 bn
Trading Value: At least JPY 25 bn✓

Median market cap of Prime
Market: JPY 57.3 bn (as ofJuly 2022)

✓

✓

✓
✓
✓

Fulfill the requirements of the Revised
Corporate Governance CodeA minimum of one-third independent board
A minimum 35% of tradable shares ratio
Disclose the rationale for cross-shareholdings

92% of Prime-listed companies
appoint at least one-third of
independent directors
Cross-held shares worth JPY
2.3 trillion sold in FY 2021

✓
✓
✓
✓

Total profit for 2 yrs at least JPY 2.5 bn
Sales at least JPY 10 bn
Market cap at least JPY 100 bn
Financial Status at least JPY 5bn✓

Source: Tokyo Stock Exchange

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JAPAN ACTIVIST INSIGHTS
Governance Structures of Listed Companies➢ Board independence and diversity enhanced: In response to TSE’s new listing standards, Japanese
corporates have increased the independence and diversity of their boards. As of June 2022, 92% of prime
companies have at least one-third of independent directors on the board, as compared to 73% in 2021, and
12% appoint a majority independent outside directors. In terms of gender diversity, 75% of Prime
companies have at least one female director, compared to 52% in 2021, although the ratio of female
directors among all directors remains at around 10%.
Ratio of Prime Market Companies
with a majority or more Independent Directors

Ratio of Prime Market Companies
with 1/3 or more Independent Directors
92%

100%

95%

20%

17%

73%

80%

12%

59%
60%
44%
40%
23%
20%

6%

27%

10%

8%

34%

6%

12%

1%

0%

1%

3%

3%

3%

4%

0%
2014

2015

2016

2017

2018

2019

2020

2021

TSE 1st Section

2022

2022

2014 2015 2016 2017 2018 2019 2020 2021 2022 2022

TSE
JPX
Prime Nikkei
Market 400

TSE 1st Section

TSE
JPX
Prime Nikkei
Market 400

Source: Tokyo Stock Exchange, Japan Catalyst, Inc
Note: As of June 2022

➢ Dissolution of cross-shareholdings in progress: Japanese firms have been gradually reducing their crossshareholdings over the past decades, and as a result, the percentage of listed companies that perceive their“stable shareholder ratio” between 40-60% has been decreasing, although it still persists at around 60%.
The implementation of the new TSE listing criteria mandating a minimum of 35% tradable shares ratio
and the redefinition of “tradable shares” to exclude shares held by domestic banks, insurance companies,
or business corporations, is believed to accelerate this trend of unwinding cross-shareholdings. The
unloading of strategic holdings by Japanese companies has reached a new historical high of around JPY
2.3 trillion in the fiscal year ended March 2022 and is expected to continue in 2023.

80%

Percentage of Listed Companies that See
their Stable Shareholder Ratio to be 40-60%

75%
70%

68.5%

65%

57.8%

60%
55%
50%
45%

*Stable shareholder ratio = the percentage of shareholders thecompany subjectively views as stable

40%

2007

2009

2011

2013

2015

2017

2019

2021

Source: Mizuho Securities Equity Research

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JAPAN ACTIVIST INSIGHTS
Stewardship Practices of Investors➢ Stricter Voting Standards: The 2017 revision of Stewardship Code, which mandates the disclosure of
voting results and justifications, has led to a tightening of voting criteria by institutional investors and ashift in their voting behavior. In response to the TSE’s market restructuring and the revised governancecode, major asset managers and proxy advisory firms further updated their proxy voting guidelines to alignwith the new listing requirements in 2022. The criteria that were revised include the ratio of independent
directors on the board, the level of cross-shareholdings, ESG integration, gender diversity and climatechange. Notably, an increasing number of domestic asset managers are implementing more stringent
voting rules for cross-shareholdings, which is anticipated to accelerate the trend of unwinding crossshareholdings prior to the 2023 AGM season.
Approval Rate for Shareholder Proposals
by Institutional Investors (2013-2021)

(%)
18
16

International institutional
investors

14
12
10
8

Domestic institutional
investors

6
4
2
0
2013

2014

2015

2016

2017

2018

2019

2020

2021

Source: Toyo Keizai
Note: Shareholder proposals submitted at the June AGMs in each year

➢ Growing support for shareholder proposals: With both domestic and global investors exhibiting everincreasing level of activist activity, a record number of shareholder proposals were made in 2022: 292
proposals against 77 companies at the June AGMs, a year-on-year increase of 80% and 60%,
respectively. As institutional investors’ voting guidelines become increasingly stringent, theseshareholder proposals garnered greater support than before. According to a survey by Nikko SMBC,
proposals related to shareholder returns have seen particularly high approval rates, averaging 18.8% in
2022, a historical high. Despite this trend, the percentage of shareholder proposals for large-cap
companies with over 20% support remains low at around 20%, with the average approval rate of only
10% in 2022, in contrast to management proposals which continue to receive over 95% approval.
Growing support for shareholder proposals has placed more pressure on management than ever before,
yet many companies continue to be protected by cross-shareholdings, making it difficult for activist
investors to gain the necessary two-thirds or majority support for their proposals, particularly if the target
board is unwilling to make changes.

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JAPAN ACTIVIST INSIGHTS
Percentage of Shareholder Proposals thatreceived over 20% approval (by Market Cap)

Number of Shareholder Proposals(by Market Cap)350
300

TOPIX 500
TOPIX Small
Others70%
Others250

TOPIX 500
TOPIX Small
Others60%

Others

50%

200

TOPIX
Small

150

TOPIX
Small

40%
30%

100

TOPIX
500

20%

50

TOPIX
500

0
FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021

10%
0%
FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021

Source: SMBC Nikko Securities
Note: Excludes shareholder proposals related to nuclear power plants. FY2021 covers the AGMs held between April 2021 to March 2022.

Reform Agenda for 2023
➢ Improvements in formality but deeper changes needed: While the TSEs’ reforms have made progressin advancing governance structures and stewardship practices, the weak or absence of enforcement
mechanism and incentives in their measures have left some fundamental issues unresolved. As of Dec
2022, out of the 1,837 companies listed on the Prime section, 269 do not meet the new listing criteria, buthave been granted, under transitional measures, to remain prime-listed if they disclose their “action plans”
to achieve the standards. This has drawn criticism from experts and investors as an end date fortransitional measures or procedures for delisting have not been established. A further, broader issue is the
low ROE and PBR multiples. Among 1,837 companies listed on Prime, roughly 50% trade at a PBR
below 1x and an ROE less than 8%. Even among large-cap companies (TOPIX 500), approximately 40%
exhibit the same level, falling behind their global counterparts.
ROE Distribution

PBR Distribution
PBR<0.5
Japan(Prime:1,837)

0.5≦PBR<1

15%

35%

1≦PBR<2

2≦PBR

27%

23%

Japan
(Prime:1,837)

28%

Japan
(TOPIX 500)

ROE<0% 0%≦ROE<8%15%≦ROE
6%50%: PBR lower than 1
Japan(TOPIX 500)

9%

34%

5%

30%

5%

5%

20%

67%

6%

40%

19%

40%
US
2% 12%(S&P 500)

5%Europe(STOXX 600)

35%

Negative Net Assets

21%

34%

47%: ROE lower than 8%

43%
US(S&P 500)41%

8%≦ROE<15%

25%

61%

14%
19%

25%

51%

0.7%

Europe(STOXX 600)

7%

12%

32%

49%

19%

24%

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Source: Tokyo Stock Exchange
Note: Compiled by TSE based on Bloomberg data as of July 1, 2022

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JAPAN ACTIVIST INSIGHTS➢ Regulatory efforts to address capital inefficiency: The TSE and the relevant authorities are poised totackle long-standing issues related to capital efficiency and corporate value. Following the implementationof the new structure, the TSE formed a panel of experts, of which Oki Masumoto is a member, to discuss
additional measures to enhance the effectiveness of their reforms. Over the past four weeks, the TSE held
the fifth, sixth and seventh meetings, primarily focusing on how to incentivize Japanese companies toenhance capital efficiency and share value, as well as how to deal with underperforming firms. According
to TSE records, the council has discussed that “given the purpose of this market restructuring is tocontribute to the improvement of corporate value of listed companies, it will be meaningless unless weaddress the fact that about half of all listed companies have a PBR below 1 and ROE below 8%”. Basedon a series of discussions, the TSE announced on January 30th, 2023 that the end date of transitional
measures will be March 2025 and outlined specific initiatives to be implemented in 2023, such as
requiring management and boards of directors to disclose plans for improving capital efficiency andprofitability.

Outline of Future Actions Presented by TSE in Jan 2023
AgendaTransitional Measures

Plans

✓

Announce the end date of transitional measures (March 2025)
and specific procedures for delisting

Implement
promptly✓

Require management and BoDs to properly identify thecompany’s cost of capital and capital efficiency and disclose
policies and specific initiatives for improvement and theirprogress

Spring 2023

Re-emphasize the purpose of “Comply or Explain” principle
and highlight inappropriate “Explain” cases
Investigate the status of nomination committees andremuneration committees

Spring 2023 /Autumn 2023

Capital Efficiency andStock Price

To Enhance Long/mid-term
Corporate Value

Schedule✓“Quality” of
Corporate Governance✓

Disclosure in English✓

Announce to mandate English disclosure for prime companies

Autumn 2023

Dialogue withinvestors✓

Require prime companies to disclose the status of dialogue withinvestors in their corporate governance reports

Spring 2023

Source: Tokyo Stock Exchange Explanatory Material on Jan 30, 2023

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JAPAN ACTIVIST INSIGHTSKey Engagement Theme➢ Boosting Productivity and Corporate Value through Strategic Resource Reallocation: Japan’s low
labor productivity is a well-known factor contributing to its sluggish economic growth. In our view, theroot cause of this productivity lag is not a scarcity of resources, but rather a misallocation of them. The
highly developed nature of Japan’s economy with a large number of long-established companies
operating within a single industry or sector, such as manufacturing, has led to intense competition and alack of consolidation. A survey by METI indicates that the market capitalization of the top fivecompanies in each manufacturing sector as a percentage of the total market cap tends to be lower inJapan than in the US., where market size is significantly larger, indicating a need for restructuring.
Furthermore, surveys by BOJ reveal that productivity disparities among Japanese firms have widened inrecent years. The relatively low rate for low-productivity companies depresses Japan’s average
productivity. Therefore, by effectively reallocating resources including capital and human resources,from low-productivity firms to high-productivity firms, we believe that companies’ capital efficiency andproductivity can be significantly improved, thereby enhancing corporate value and competitiveness ofJapanese firms. This will be a key focus of our engagement strategy in 2023 and beyond.

Real Labor Productivity of Listed Firms(Japan)Source: Bank of Japan
Note: Real labor productivity is per hour worked"Survival Rate" of Low Productivity Firms

Source: Bank of Japan
Note : Low productivity firms = Lower 20 percentile➢ Advancing Effective Resource Reallocation through Constructive Engagement: In alignment withthis central theme, we will continue to engage with companies in a constructive manner to promote theefficient reallocation of resources, including capital and human resources, with the aim of enhancing
capital efficiency. On January 4th, 2023, Oki Matsumoto resigned as Chairman of Monex Securities todevote even more time to engagement efforts as Chairman of Japan Catalyst. As a domestic constructive
activist, we will continue to expand our efforts to engage in constructive dialogue with target companies
and unlock value.
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JAPAN
JAPANACTIVISTACTIVISTINSIGHTSINSIGHTS

About Japan Catalyst
Japan Catalyst, Inc. was established as a part of Monex Group, Inc. with the goal of transforming theJapanese capital market and corporate sector. As the business environment rapidly evolves, there is a
growing need for changes in corporate management, and companies are seeking to transform. By offering
support through long-term investment and engagement, we aim to act as a catalyst for positive change inJapanese companies.
Company Website (English) https://www.japancatalyst.com/index-en.html

CONTACT

Ayaka Matsui
Japan Catalyst, Inc.
ir@japancatalyst.com+81-3-5657-9970

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