JAPAN: An Introduction to Capital Markets: Domestic
In 2024, the stock market in Japan remained unstable due to soaring resource prices and the 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, 2024 saw the listing of a number of companies from different industries, such as deep-tech and sustainability-related businesses. In addition, listings on the Tokyo Pro Market (and subsequent step-up listings to the Main Market), as well as the achievement of listings after growth with the support of large corporations, such as the so-called “swing by IPOs”, are becoming increasingly common. There is growing diversity in the approaches that companies are taking to pursue IPOs, reflecting a broader trend towards varied strategies to achieve public listings.
Furthermore, there have been many cases of listed companies selling their cross-shareholdings to unwind them for transparency in corporate management and maximisation of corporate value. In particular, such dissolutions are accelerating among blue-chip companies and listed financial institutions, including insurance 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 the shares they acquire upon exercise of these rights on the market.
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 stagnant. 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 transactions of unlisted shares
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. Also, the handling of sales of unlisted shares to such investors by securities firms is in principle prohibited, but the exceptions to this rule have been expanded. In addition, amendments are under way to relax the licence requirements for operating a secondary trading platform for unlisted shares.
Reviewing the pricing process for 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 the IPO), and the newly listed company has therefore received less than it could have raised. The pricing process has now been reviewed to address this issue.
Reviewing 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 was 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 Recent Trends in Japanese Capital Markets
In Japan, the disclosure rules for listed companies were revised in January 2023, and mandatory disclosure of sustainability information is now required, starting with the annual securities reports for the fiscal year ended 31 March 2023. The Sustainability Standards Board of Japan (SSBJ), established by the Financial Accounting Standards Foundation, released the draft disclosure standards for sustainability information in Japan on March 2024. These standards are almost consistent with the global standards IFRS S1 and S2 released by the International Sustainability Standards Board. Japanese companies must now prepare the disclosure of sustainability information in annual reports while referring to the SSBJ standards.
The Financial Instruments and Exchange Act of Japan (FIEA) had traditionally required Japanese listed companies 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, it was pointed out that these two disclosures should be streamlined into one. Therefore, the FIEA was recently amended to abolish the disclosure of quarterly reports by listed companies (semi-annual and annual reports are still required), with effect from 1 April 2024. This will have a significant impact on the disclosure practices of Japanese listed companies.
Since last year, there have been some cases of Japanese listed companies offering bond-type class shares with listings to a stock exchange, such as in SoftBank Corp’s case in November 2023. Bond-type class shares are a hybrid security that allows for equity financing with no dilution of the voting rights of common shareholders. In addition, an important feature of these cases is that bond-type class shares are listed on a stock exchange, which allows individual investors to invest in them. While there are limited cases for now, this could potentially become an important option for equity financing by Japanese listed companies in the future.