A new crop of leaders that rose through the ranks of corporate Japan in the aftermath of its economic bubble looks set to advance governance reforms that are key to further gains in the stock market.

Almost half of Topix 500 Index companies - from department store group Isetan Mitsukoshi Holdings Ltd to human resources technology firm Recruit Holdings Co - have installed new chief executives since 2021, according to data compiled by Bloomberg. While their average age of 62 has held steady over the past decade, it’s close to peers in the US, and a world away from the image of an aging Japanese business elite that is too set in its ways to change.

The shift is particularly important now, with investors training the spotlight on corporate governance reforms as they weigh the sustainability of Japan’s stock market rally, which has sputtered since the Nikkei 225 Stock Average hit a record high earlier this year. It also matters as Japan emerges from decades of stagnation to be a genuine competitor with China and India for new global investment flows into Asia.

Current leaders have “less affinity to and dependence on some of the cozy things that held up traditional corporate culture,” said market veteran Michael Jacobs, an investment analyst at T Rowe Price Japan Inc. “Trying to maximise the market value of your company is not as threatening and disorienting as it was for a previous generation.”

Unlike the CEOs who came of age at a time when corporate Japan was seen as a role model, many of the new crop were in junior roles as the nation’s economic miracle unraveled. They’re now seeking out new ways of doing things, including embracing investor-friendly ideas that increase returns.

The share price of firms with newer and younger chiefs increased 41% on average since the start of last year, when the Tokyo Stock Exchange ramped up corporate governance reforms. This compares with 38% for the remainder of the Topix 500 companies, data compiled by Bloomberg show.

There are many examples of the new cohort pushing forward initiatives such as better disclosures, board diversity and adoption of new technologies. This carves out opportunities for fund managers to bet on the firms that move at a faster pace to improve, and to shun or agitate for change in the others that resist.

The shift in the mindset of CEOs is part of a broader and increasingly positive reflationary picture for Japanese markets, and a recognition that “a vibrant and dynamic stock market is actually good for the national interest,” Jacobs at T Rowe Price said.

The 45% turnover in Japanese CEOs since early 2021 compares with 36% in the US, and 42% in Europe, according to data compiled by Bloomberg.

Annual general meetings this month bring corporate governance reforms into even sharper focus for management teams concerned about approval rates, said Bruce Kirk, chief Japan equity strategist at Goldman Sachs Group Inc.

The Isetan Mitsukoshi group, whose first store opened in 1673 during the samurai era, will hold its AGM on June 24. The company has seen strong profit growth since Toshiyuki Hosoya, 59, took the helm in April 2021, and its market value has increased almost fourfold since then.

The latest earnings results from many companies have “confirmed corporate reforms are accelerating, and we see this as pointing to an upward trend in Japanese equities over the longer term,” Rie Nishihara, chief Japan equity strategist at JPMorgan Securities Japan Co said in a research note late last month.

JPMorgan said it’s focusing in particular on commitments to reduce net cash at Recruit Holdings, which has been run by Hisayuki Idekoba since April 2021, who at 49 is one of the younger Topix CEOs. Isetan Mitsukoshi also stands out for its profit growth upgrades, JPMorgan said.

Nishihara also noted progress at Toyota Motor Corp. Since Koji Sato, 54, became CEO in April last year, the world’s largest automaker announced its biggest share buyback on record, while some major Japanese financial groups are starting to divest strategic holdings.

In Japan, which has traditionally placed a high value on seniority, corporate leaders still tend to be slightly older than peers. But the gap has narrowed with the average age remaining fairly steady over the past decade, while in the US and Europe it’s risen by two years, to 59 and 56, respectively, data compiled by Bloomberg show.

Even so, about 13% of Topix 500 CEOs are 70 or older, compared with 4% for S&P 500 companies and just 2% for Stoxx Europe 600 firms.

Of course age is far from being the only factor in leadership diversity as well. Japan is hugely lagging other major markets when it comes to female CEOs.

“You need to have healthy clashes of different perspectives,” to improve a company’s governance, said Katsuhiro Sato, a professor at Waseda Business School in Tokyo and a former partner at McKinsey & Co. “That’s still missing.”

Some companies have questioned the benefit of the reforms. A business lobby of firms in the key economic region of Kansai, including Sumitomo Electric Industries Ltd, Daikin Industries Ltd and Panasonic Holdings Corp, has called on the government to ease the guidelines on outside directors, saying there aren’t many suitable candidates, partly due to Japan’s rigid labour market.

The boards of companies run by a younger cohort of CEOs tend to have slightly more outside directors. The ratio of independent directors in Japan is still markedly lower than 86% in the US, and 69% in Europe, according to available data on Bloomberg.

Diversity at Japanese firms is seen as an important factor in increasing dialogue with investors, chipping away at entrenched beliefs in many corporate headquarters that money managers are only after quick gains and know nothing about their companies.

For Yosuke Tsuji, 47, president of Money Forward Inc, aiming for strong governance is a natural move as it helps attract overseas money. The listed fintech firm has sought support from independent directors in order to bring in more management experience, he said.

The success of some well-known Japanese companies such as Hitachi Ltd, which got a new CEO in April 2022, in boosting profitability have also helped showcase potential benefits of management reforms. Its stock has gained about 170% since then, more than four times the Topix. As for Renesas Electronics Corp, the chipmaker’s shares have surged 400% since Hidetoshi Shibata, 51, took the helm in 2019.

“My generation, and the one after it, come from an era when the Japanese economy lost its shine,” said Oki Matsumoto, 60, chairman of Monex Group Inc and a member of the TSE panel that came up with capital improvement initiatives about a decade ago. “In recent times, more CEOs have become eager to listen to outside directors’ opinions, and that is a big change.”

  - Bloomberg