TSE Governance Reform (Japan)

What Is the TSE Governance Reform?

The Tokyo Stock Exchange (TSE) governance reform refers to a sustained campaign by the TSE — Japan’s primary stock exchange — to compel listed Japanese companies to improve capital efficiency, increase price-to-book (P/B) ratios, and enhance returns to shareholders. The reform is the most consequential structural driver of Japan’s M&A activity in the current cycle, unlocking deal flow across carve-outs, take-privates, and cross-shareholding unwinds that were structurally inaccessible under the prior governance environment.

The reform’s roots lie in Japan’s persistent “P/B problem.” As of 2023, roughly half of Tokyo Prime Market companies traded below 1x price-to-book — meaning the market valued them at less than their net assets. This reflects decades of capital being trapped in inefficient corporate structures: excessive cash holdings, complex cross-shareholding networks, non-core subsidiaries, and conglomerate structures with poor capital allocation discipline. The TSE concluded that passive encouragement was insufficient and shifted to direct pressure backed by the implicit threat of delisting or reclassification.

The March 2023 TSE Request

The pivotal moment was March 2023, when the TSE formally requested that all Prime Market and Standard Market companies trading below 1x P/B — or with return on equity (ROE) below 8% — submit a public disclosure of measures to improve capital efficiency. This was not a regulation, but in Japan’s governance culture, a TSE “request” carries quasi-mandatory force: non-compliance is noticed by institutional investors, proxy advisors, and the exchange itself.

The request required companies to:

• Analyse the causes of their low P/B or ROE relative to peers and cost of capital
• Develop and disclose a concrete plan to improve capital efficiency
• Implement the plan and report progress on a regular basis

For the first time, Japanese corporate management teams — historically insulated from shareholder pressure by stable cross-shareholding relationships and management-friendly board structures — faced direct institutional accountability for capital allocation decisions.

M&A Implications

The governance reform is generating several distinct categories of M&A activity:

Carve-Outs and Divestitures

Japanese conglomerates with sprawling business portfolios are divesting non-core subsidiaries to focus resources and improve aggregate P/B. Carve-outs of non-core divisions — businesses that are valuable standalone but drag on conglomerate capital efficiency — are the most direct and immediate deal flow driver. For PE firms and strategic acquirers, Japanese corporate carve-outs represent well-managed businesses with established customers, but often undermanaged relative to their potential.

Take-Privates

Companies that cannot credibly improve their P/B as listed entities are increasingly open to take-private transactions. PE funds — including KKR, Bain Capital, Carlyle, MBK Partners, and Japan-focused domestic GPs — have executed a significant number of listed take-privates since 2022. The Toshiba take-private by Japan Industrial Partners was the landmark transaction; since then, deal sizes and volumes have both increased.

Cross-Shareholding Unwinds

Japanese companies historically held equity stakes in business partners and suppliers as relationship cement — the so-called “cross-shareholding” network. The governance reform has made these holdings more costly to maintain (they suppress P/B and concentrate governance risk), prompting systematic unwinds. When Company A sells its stake in Company B, Company B’s ownership becomes more dispersed and potentially contested — creating both activist and strategic buyer opportunities.

Succession + Governance Pressure Intersection

For Japan’s large population of family-owned listed companies, governance reform creates dual pressure: performance improvement demands from the exchange on one hand, and founder succession timelines on the other. This combination is producing a cohort of companies that are simultaneously being encouraged to consider strategic transactions and facing ownership transition.

PE and Strategic Buyer Activity

Foreign PE funds have been the most aggressive beneficiaries of the governance reform deal flow. Japanese listed company management teams — which historically were hostile to PE — have become more receptive as TSE pressure creates the need for partners who can help drive the P/B improvement plan. The reputation of PE as purely extractive has softened as funds demonstrate value creation in Japanese portfolio companies.

Domestic Japanese PE — including Unison Capital, Integral Corporation, and Advantage Partners — is also active, and in many cases preferred by Japanese target management over foreign funds for cultural and continuity reasons.

Strategic acquirers from the US, Europe, and other APAC markets are active in the carve-out category, seeking to acquire Japanese business units with strong operational capabilities and customer relationships.

What This Means for Deal Teams

For advisors and investors covering Japan:

• The TSE governance reform has converted Japan from a structurally challenging M&A market into one of the most active in Asia Pacific
• The pipeline of carve-out and take-private opportunities is structural, not cyclical — it will persist as long as the P/B reform pressure continues
• Management relationship and cultural competency remain essential — the reform creates willingness; trust and process quality close deals
• Domestic PE, foreign PE, and strategic acquirers are all competing for the same targets, compressing timelines and requiring early conviction

For a broader view of Japan M&A dynamics, see our Japan M&A cross-border guide and APAC private equity trends 2026. For a detailed look at how PE is executing take-private transactions under the TSE reform, see Japan Take-Private M&A in 2026. Amafi’s origination service covers Japan deal flow for partner advisory firms working the carve-out and succession pipeline.