Japan's corporate governance wave reaches the industrial heartland in Nagoya

Japan Times

09-05-2025

Signs are emerging that Japan's much-touted corporate reforms are reaching the industrial heartland of Nagoya, after sweeping through Tokyo and helping lift share prices.
Nagoya, a bustling city some 340 kilometers west of Tokyo, and the area around it are home to manufacturing giants including Toyota, the world's biggest automaker, and Toyota group auto parts maker Denso. Aichi Prefecture, where Nagoya is located, is the country's biggest manufacturing hub and home to the largest producer of cars, electronic machines and ceramics, among others.
Companies in this region are reputed to be even more conservative in their balance sheet management than the rest of Japan, and cash holdings data bear this out: two-thirds of companies included in the Maxis S&P Tokai ETF, which invests in 50 companies in the region, are net cash positive, compared with 39% firms excluding banks in the Topix 100, according to Bloomberg-compiled data.
Over the past year, the Tokai ETF has underperformed the broader market, and corporate reform measures to boost equity value are looking more attractive to managers in the region. Tokyo firms have enjoyed the whiff of success, and some Nagoya-area companies are emulating their embrace of reform. That can be seen at Toyota, itself: it's proposed a $42 billion buyout of Toyota Industries, choosing to consolidate the Japan's biggest business group, rather than leave as is the company founded by Toyota Chairman Akio Toyoda's great-grandfather.
Central Japan Railway, also known as JR Central, meanwhile surprised the market last week with its first-ever share buyback in the company's 27-year history as a publicly traded company. The stock jumped 9.8% in the following session, a huge move given the size of its buyback was about 4.6% of outstanding shares.
Corporate actions like those suggest that Japan's 3-year-old corporate governance campaign has more room to grow and unlock value in Japan's industrial heartland. It also highlights the opportunity for investors to make money by going for long-term bets on companies that are gradually warming up to reforms, while sitting on vast amount of cash and cross-holding shares of allied firms.
"I feel there is a possibility that companies in the Nagoya region are starting to change,' said Yoshiki Nagata, CIO of enTorch Capital Partners. "Many companies in the region are protected by cross share-holdings by regional firms. But if the region's leading company like JR Central is changing, the entire region might be changing.'
Reforms aimed at boosting profits at Japanese companies and simplifying corporate structures have been closely watched by global investors. While U.S. tariffs have hit the manufacturing powerhouses, the perception of a slower response to governance drive may have also weighed on their shares, some investors say.
The jury is still out on what it means that Toyota's founding family unveiled plans to buy out Toyota Industries, but some investors took it as a sign that Japan's biggest company by market value intends to keep streamlining its complicated cross-share holding between its group companies.
Toyota has also vowed to boost its return-on-equity to 20%, compared with 9% to 16% over the past five years, leading some investors to bet the company is looking to make radical changes rather than dribble out incremental improvements.
The share market's exultant reaction to JR Central's buybacks may inspire more companies to follow suit.
"No one was expecting it. That's why it had such a huge impact,' said Taku Ito, chief equity fund manager at Nissay Asset Management. "It was good for the market that the company busted a gut.'