TLDR: Japan is rewriting its Corporate Governance Code for the first time in five years, and regulators are also revising the Companies Act. For foreign investors, the changes touch board accountability, shareholder protections, and how companies justify sitting on piles of cash. There’s also a quieter story about tighter screening on foreign deals in sensitive sectors.
A Decade in the Making
Japan’s governance overhaul didn’t start this year. It traces back to 2015, when the country introduced its first Corporate Governance Code and Stewardship Code. Those early rules asked listed companies to open up more, disclose more, and actually talk to their shareholders instead of treating annual meetings as a formality.
That first wave worked, at least by the numbers. Japanese equities, long seen as cheap and under-loved, started attracting real attention from abroad. But a decade later, regulators think the job isn’t finished.
Why 2026 Is Different
This year marks the first full revision of the Code in five years. The Financial Services Agency has been blunt about the goal: move governance “from form to substance.” In plain terms, a lot of Japanese firms checked the boxes (independent directors, disclosure reports, investor relations pages) without actually changing how decisions get made in the boardroom.
The FSA opened the draft revisions for public comment earlier this year, and the Ministry of Justice ran a parallel consultation on amendments to the Companies Act, the law that governs how Japanese firms are formed, run, and overseen. Together, those two tracks are reshaping the legal backbone of corporate Japan.
What’s Actually Changing
A few threads run through the proposed changes, and they matter differently depending on what kind of investor you are.
Cash Hoarding Gets a Harder Look
Japanese companies have long been criticized for sitting on enormous cash reserves instead of deploying capital or returning it to shareholders. The revised Code is expected to push for clearer explanation of resource allocation decisions, basically forcing boards to justify why they’re holding so much cash rather than investing it or paying it out. The Tokyo Stock Exchange had already started this push in 2023, telling listed firms to manage with “cost of capital and stock price” in mind. The 2026 revision builds on that and adds teeth.
Board Leadership and Minority Shareholders
Regulators also want to reinforce board leadership norms and clarify protections for minority shareholders, a group that’s historically had less sway in Japan than in the US or UK. Cross-shareholdings, where companies quietly hold stakes in each other’s businesses to avoid outside pressure, remain a target too. Analysts expect the revision to ask companies to be clearer about why they still hold those stakes and what purpose they actually serve.
Dialogue Has to Be Real, Not Performative
The third big piece is investor engagement. Companies will be expected to show that dialogue with institutional investors is substantive, not a scripted call once a year. That’s a hard thing to legislate, but the FSA has signaled it plans to scrutinize engagement quality, not just whether a meeting happened.
The Part Foreign Investors Should Watch Closely
Here’s where it gets complicated. While the governance reforms are generally seen as investor-friendly, there’s a separate and less welcoming trend running alongside them.
Japan has been tightening how it applies the Foreign Exchange and Foreign Trade Act, the law that screens foreign investment in sensitive sectors. For most portfolio investors buying shares in a bank or a consumer brand, this won’t matter much. But for strategic investors eyeing stakes in semiconductors, defense-adjacent industries, or critical infrastructure, the screening process has gotten more rigorous. That’s a policy risk layered on top of the governance story, and it’s worth factoring in separately from the Code revisions themselves.
Is the Reform Momentum at Risk?
Not everyone is convinced the direction is locked in. Some investors have expressed concern that political or industry pushback could soften the final language of the Code before it’s adopted, especially given how far-reaching the proposed cash allocation and shareholder protection rules are. Japan has a long history of consensus-driven policymaking, and consensus sometimes means compromise.
Still, the broader trajectory hasn’t reversed. Average return on equity and price-to-book ratios in Japan continue to lag other developed markets, which gives regulators a data-backed reason to keep pushing rather than ease off.
What This Means Going Forward
For investors already in Japanese equities, the next year or two is about watching implementation, not just the headline rules. Companies that genuinely adapt, improving disclosure, engaging seriously with shareholders, and explaining their capital decisions, are likely to get rewarded with more investor attention. Companies that treat this as another round of paperwork risk falling further behind.
And for anyone considering a larger strategic position rather than a simple portfolio stake, it’s worth running the FEFTA screening question early. Japan is opening its boardrooms wider, but it’s also watching its borders a little more closely. Both things are true at once, and that’s the environment foreign capital will be navigating as this reform plays out over the next two years.