An important update to our January 20 "next catalyst" Insight note as the first draft CGC revisions are published
In my 20 January GBM AM Insight note, "The New Year has started well for Japanese Equities – Now for the next catalyst," I argued that after the electoral rally, the next focus for Japan's equity story of structural change would be the next revision of the Corporate Governance Code (CGC) scheduled for this year. This was shortly followed by a note from my colleague John Fou also on the CGC revision, "Japan's 2026 Governance Pivot and why 50,000 will be seen as just a first step," which went further: governance enforcement – not reflation, not yen, not Takaichi politics – John argued would be the force that finally re-prices Japanese corporates against global peers.
Earlier this month, the FSA and Tokyo Stock Exchange published the first draft revisions for public consultation (comments open until 15 May; final code by summer; compliance disclosures by July 2027). The anticipated catalyst has, in other words, arrived.
But so far, the reaction from the expert community has been, to put it politely, underwhelmed.
In a recent op-ed in the Nikkei Asia, Nicholas Benes – the man who literally proposed the original Code in 2013 and the undisputed guru on this subject – while noting some good points, called the draft a "lost opportunity," flagging the absence of any push for majority-independent boards, any clarification of the chair role, any definition of "corporate value," and no guidance on lead independent directors, term limits, or activist-response committees. The International Corporate Governance Network (ICGN) and others also echoed similar notes of disappointment – softer in language, but similarly underwhelmed with the substance. But I think this negative emphasis is way too harsh. Indeed, this initial underwhelmed reaction is precisely why foreign investors should be leaning into this, not away from it.
The draft CGC is organised around three pillars, and one overarching framing.
The framing matters most: the FSA has explicitly re-characterised the Code as moving from "defensive governance" toward "growth-oriented governance." The accompanying paper – The Revised Corporate Governance Code to Promote Growth Investments – states it in the opening paragraph: the Code "does not solely emphasize defensive governance," but aims to "bolster companies' value creation capacity." The three pillars are:
The methodological change – pruning prescriptive text from the Principles into a new layer of Interpretive Guidance, with the stated aim of "substance over form" – is what I think most of the negative commentary has most underrated. To those critics, it reads as softening. But not to me.
The disappointed read rests on a specific, and in my view wrong, theory of how corporate behaviour changes in Japan, which is that Japan only moves when forced, so more prescription equals more change.
The historical evidence points the other way, especially in recent years. Yes, the original 2015 Code was voluntary, principles-based, and widely dismissed at the time as "toothless" – but it ended up re-wiring Japanese boards over a decade. The 2018 and 2021 revisions were again modest, yet they still drove independent-director ratios from a minority curiosity to the global-peer norm inside five years. And as I discussed in my January 20 Insight note, the TSE's simple March 2023 appeal for "Action to Implement Management that Is Conscious of Cost of Capital and Stock Price" carried no legal force – yet it triggered the largest surge in Japanese buybacks and cross-shareholding unwinds in modern memory, and re-priced a cohort of sub-book names within 18 months.
The point is that Japanese corporates, uniquely, respond to nudges. "Comply-or-explain," peer pressure, reputational sensitivity, and bureaucratic expectation combine so that seemingly innocuous language – the phrases Benes et al would like sharpened – has, in Japan, a history of driving outsized behaviour change. This is a point many foreign commentators of Japanese governance reforms have consistently underestimated.
Another reason for optimism is that nudges are infinitely more powerful when the surrounding tide is already rising. And in Japan this year, the tide surrounding this revised CFC is unlike any time since the very first CFC – with all the sea changes I listed off in my most-recent Insight post; the end of three decades of deflation; the hand-over to a new generation of leaders with fundamentally different instincts about capital, risk and shareholder value; the 10-year JGB yield at 29-year highs, embedding genuine risk premia for the first time in a generation; and energy costs structurally re-rated higher. Each of these forces, on its own, makes hoarding cash an active destruction of shareholder value. Together they turn the Code's "softest" changes into interpretive levers of enormous force.
Three examples of "small" language where I expect large corporate reactions:
FSA Commissioner Yutaka Ito has been unambiguous on the spirit. In his March Reuters interview he framed clear growth plans as "the best defence against short-term activists"; at Bloomberg's Tokyo credit forum he urged deployment of the ¥82.9 trillion cash pile. The regulator is not asking for defensive compliance. It is asking for offensive deployment.
So in sum, the disappointment narrative is a gift. Every time the foreign consensus dismisses a Japanese governance step as incremental, it underestimates the cumulative mechanism. In 2015 the same voices called the original Code toothless. In 2023 they called the PBR letter a PR gesture. Yet both drove historic re-ratings, and effected real changes in behavior. I expect the same for these latest CGC revisions, with particular focus on capital-return leaders, cash-heavy "substance-over-form" names vulnerable to being nudged into action, potential M&A beneficiaries from cross-shareholding unwinds, and independent-chair adopters ahead of the peer norm. As I wrote previously, the staggered take up should offer potentially huge alpha opportunities. Despite the muted reaction to its draft, I still expect the revised CGC to be the same catalyst for more exciting change in Japan that John and I wrote about back in January.
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