JAPAN: An Introduction to Capital Markets: Domestic

Conditions of the Equity Market  

In 2023, the stock market in Japan remained unstable due to the prolonged conflict between Russia and Ukraine, the worsening situation in the Middle East, soaring resource prices, and sharp fluctuation in interest and exchange rates while the Nikkei Stock Average reached its highest level since the bubble economy burst in the early 1990s.

The number of IPOs in Japan remained strong, while the overall trend was towards smaller offerings. On the other hand, 2023 saw the listing of a number of companies from different industries, such as deep-tech and sustainability-related business. In addition, the growing awareness of management using return on equity as a management indicator has also led to increased momentum for spin-off listings, where companies spin off their subsidiaries or businesses and list them on the stock exchange.

Furthermore, there have been many cases of listed companies selling their cross-shareholdings to unwind them. In particular, such dissolutions are accelerating among blue-chip companies.

In the post-pandemic world, listed companies in difficult business environments are continuing to raise capital through private investments in public equity (PIPEs), where securities firms and equity investors are allocated stock acquisition rights and sell on the market the shares they acquired upon exercise of the rights.

Capital Market Reform as a Growth Strategy for Japan

Currently, the supply of growth capital to unlisted companies in Japan is a challenge. In recent years, the market capitalisation of newly listed companies in Japan has been at most JPY200 billion. There are various opinions on the reasons for this, but some point to an insufficient supply of venture capital, which prevents companies from growing sufficiently at the unlisted stage.

In view of this situation, the government of Japan has made several proposals for capital market reform since 2020, and has made progress in revising regulations to ensure a smooth supply of growth capital and to revitalise the capital market. 

Improving the environment for activating private placement transactions
The Japanese capital market has limited opportunities for private investors to invest in unlisted companies, and the base of investors other than venture capital firms is narrow. With a view to increasing the flow of funds to unlisted start-ups, changes have been made to legal restrictions to broaden the range of investors eligible to invest in unlisted companies by, for example, making the requirements for such investors more flexible.

Review of the pricing process for initial public offerings (IPOs)
In the past, there has been a problem with IPOs in Japan, where the initial market price (ie, the market price immediately after the listing) has tended to be much higher than the offer price (ie, the price offered in IPO), and the newly listed company receives less than it could have raised. The pricing process has been reviewed to address this issue.

Review of the regulations to facilitate communication with institutional investors during the IPO process 
Along the same lines as the “testing the waters” process in the USA, regulatory changes have been made to allow contact with institutional investors at an earlier stage than previously possible.

As the regulations surrounding Japan’s capital markets have changed rapidly in recent years, the country is reaching a turning point in terms of attracting foreign investors.

Other Trends in Japanese Capital Markets

In Japan, the disclosure rules for listed companies were revised in January 2023, and mandatory disclosure of sustainability information has been required starting with the annual securities reports for the fiscal year ended 31 March 2023. Although many details remain unclear, the Sustainability Standards Board of Japan (SSBJ), established by the Financial Accounting Standards Foundation (FASF), has been working to establish the disclosure standard for sustainability information in Japan.

The Financial Instruments and Exchange Act of Japan (FIEA) has traditionally required listed companies in Japan to disclose quarterly reports in addition to their annual securities reports. However, since listed companies are also required to disclose quarterly financial results based on the rules of the Tokyo Stock Exchange (TSE), it has been pointed out these two disclosures should be streamlined into one. Therefore, the FIEA has recently been amended to abolish the disclosure of quarterly reports by listed companies (semi-annual and annual reports are still required). The amendment will take effect on 1 April 2024 and will have a significant impact on the disclosure practices of listed companies.

In April 2022, the TSE reorganised its market categories into three markets: Prime, Standard, and Growth. As a transitional measure, companies that did not meet the listing maintenance standards for each market at that time were required to submit a plan to progress towards conforming to the listing maintenance standards, and to take steps to improve those standards, which were more relaxed than the original standards. Recently, however, the TSE has announced that the original listing maintenance standards will again be applied on or after 1 March 2025 and that, in principle, the transitional measures will not be applied thereafter. As such, companies that do not meet the criteria for maintaining their listings will need to take necessary measures such as capital policy or changing the listing market to do so.

Since 2020, listing schemes using special purpose acquisition companies (SPACs) have spread in the USA, and other countries have also revised or introduced their own rules for SPACs. In Japan, the TSE established a study group in 2021 to discuss the introduction of the SPAC system. However, issues such as conflicts of interest were raised, so, at this point, the rules for SPACs have not been introduced.