Nikkei climbs 1.8% as small-caps seen gaining on buybacks

Smaller Japanese companies may outpace their larger peers as Tokyo Stock Exchange governance reforms push more firms to buy back shares and narrow valuation discounts, Rakuten Securities chief strategist Masayuki Kubota said.

Buybacks have climbed in recent years after the exchange called on listed companies to improve returns on shareholders' capital, Kubota said. Many smaller firms still trade below book value, leaving room for further gains if the trend persists. Large-cap Japanese stocks have also tended to underperform when interest rates rise, a pattern that could favor smaller names as the Bank of Japan normalizes policy.

The Nikkei Stock Average rose 1.8% to 66,167.70 in early trade, led by chip-related stocks on continued hopes for artificial-intelligence demand and signs of U.S. economic strength. SoftBank Group climbed 6.2%, Tokyo Electron gained 4.5% and Lasertec advanced 7.1%. The dollar traded at 156.12 yen, little changed from Friday's Tokyo close of 156.18.

Shareholder returns across the market have risen steadily, with dividend payments hitting a record ¥21.7 trillion ($135 billion) and total payouts combined with buyback programs reaching more than ¥45 trillion in the fiscal year ended March, according to compiled data. Asset sales by listed Japanese companies expanded to ¥3.2 trillion, the most since 2008.

Governance Push Widens Beyond Megacaps

The exchange's campaign, launched in 2023, has so far concentrated on the largest companies, many of which have responded with record buybacks and higher dividends. Hiromi Yamaji, chief executive of Japan Exchange Group that runs the bourse, has called for "appropriate allocation of resources" including cash and human capital as more cross-shareholdings and non-core businesses are sold.

The next phase of the reform is likely to reach smaller listed firms, where valuation discounts remain deepest. Kubota's call echoes a broader investor view that the governance cycle has further to run beyond the benchmark heavyweights that have driven the Nikkei to record highs.

The government's separate push for companies to prioritize long-term growth has raised concerns it could clash with the exchange's capital-efficiency drive. Ryohei Yanagi, a visiting professor teaching corporate governance at Waseda University, warned that "there's much more of a risk of losses, as well as deterioration in corporate value, if companies rush to unprofitable investments."

This article is for informational purposes only and does not constitute investment advice.