Japan’s latest dividend outlook makes for compelling reading.
Supported by robust corporate profits, listed companies are expected to pay more than 20 trillion yen (around $127 billion) in dividends in the fiscal year ending March.
That’s a record, and the implied payout ratio is now close to 40% – above even the S&P 500 average of roughly 34% over the same period.
But the shift is more than a headline number.
It’s clear evidence Japan’s long-running push to raise corporate governance standards is producing tangible outcomes. It also challenges the outdated view of Japan as a market defined by shareholder neglect and persistent cash hoarding.
Importantly, the reform story is far from over.
With further revisions to the Corporate Governance Code anticipated this year, we expect the pace of change to accelerate rather than fade.
One of the most significant drivers of governance reform in Japan over recent years has been its growing emphasis on capital efficiency.
In 2023, the Tokyo Stock Exchange (TSE) issued guidance requiring companies trading below a price-to-book ratio (PBR) of 1 (firms the market believes are generating returns below their cost of capital) to publish clear plans to lift valuations above that threshold.
In practice, this meant companies were pushed to show how they would improve shareholder outcomes through measures such as stronger capital returns and more productive investment.
It was a bold move, directly confronting a long-standing feature of Japanese corporate balance sheets: large cash reserves and under-utilised assets that were rarely questioned.
And crucially, the exchange did not stop there. It went further by introducing what has become a highly visible “name-and-shame” regime, publicly identifying companies that failed to produce credible improvement strategies.
The positive impact is clear.
Alongside rising dividends, the average PBR across listed Japanese companies has climbed from 1.1 in 2022 to 1.4 in 2025, while average return on equity has improved from 8.4% to 9%.
But the next phase may be even more meaningful for investors.
Japan’s Financial Services Agency, in its most recent Action Programme for Corporate Governance Reform released last June, listed “clarifying accountability on whether companies are effectively utilizing cash and deposits for investments” as one of its four core objectives. These objectives will guide the TSE’s anticipated Governance Code revisions this year.
The implication is that reform focus may broaden beyond simply addressing companies with weak balance sheets and low valuations. Instead, we may see the embedding of capital discipline, shareholder returns, and accountability across the entire market.
In other words, even companies already trading at higher valuations and delivering strong return on investment (ROE) could face increasing pressure to justify excess cash balances more explicitly.
This expansion hasn’t come out of nowhere.
Recent data shows that the ratio of cash and deposits to GDP at non-financial corporations in Japan stands at 59.2%, materially higher than Western peers. And since taking office last October, prime minister Sanae Takaichi has repeatedly challenged companies publicly for failing to put surplus cash to work.
Rationalising the market
We believe this broadening of governance expectations may have positive implications for investors in two key ways.
First, it shifts the governance conversation away from valuation metrics alone and towards capital efficiency at any level. It will frame capital discipline as a universal standard, rather than a remedy reserved only for the most obviously undervalued businesses.
Second, it is likely to reinforce a trend that is already reshaping Japan’s market structure: de-listings.
In total, 124 companies delisted from the TSE last year.
At face value, fewer listed companies could sound negative because it means a smaller opportunity set. But it’s more about the quality of the companies that are delisting.
As governance expectations rise and public scrutiny increases for firms that fail to articulate credible strategies, it becomes less attractive and less prudent for lower-quality companies to remain publicly traded. For some, de-listing is a simple way of avoiding the higher standards now demanded by shareholders and regulators.
Looking ahead, we expect this dynamic to continue.
With further revisions to Japan’s Corporate Governance Code expected to add an increasingly explicit focus on accountability, capital allocation and the use of excess cash, the bar for remaining listed is likely to rise again.
That should encourage further market rationalisation, reinforcing a shift toward quality over quantity.
The net result is a Japanese market gradually becoming more concentrated in companies willing to meet higher expectations around transparency, sustainable profitability and shareholder alignment; a structural improvement that benefits both domestic and international investors.
Japan’s record dividend outlook is not a one-off.
It reflects governance reforms that are becoming embedded in corporate behaviour, with expectations set to rise further as standards tighten again this year.
For investors, these reforms may signal a market offering stronger capital discipline, more reliable shareholder returns and improving long-term credibility.
Megumi Takayama is a portfolio manager and analyst on the Chikara Japan Income and Growth fund and the CC Japan Income & Growth trust. The views expressed above should not be taken as investment advice.