Three Years After the TSE PBR Reform — The "New Structure" of Shareholder Returns Revealed by Accelerating Buybacks and Dividend Hikes

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It has been roughly three and a half years since the Tokyo Stock Exchange called on companies trading below a price-to-book ratio (PBR) of 1x to disclose improvement plans, a milestone that will reach the September 2026 mark. The combined total of share buybacks and dividend increases by domestic companies is expected to reach approximately ¥21 trillion in fiscal year 2025, setting a record high for the third consecutive year. What matters here is not the sheer size of that figure, but rather the question of whether the structural shift in corporate behavior is accompanied by genuine improvements in core business competitiveness.

What Is Happening

In March 2023, the TSE requested that listed companies on the Prime and Standard markets disclose their current status regarding sub-1x PBR valuations and outline measures for improvement. According to data compiled by Japan Exchange Group (JPX), total share buybacks in fiscal year 2025 amounted to approximately ¥12 trillion, while total dividends reached approximately ¥9 trillion — a 15% increase year-on-year and a new record for the third straight year.

On X, weekends have repeatedly seen trending topics like "share buyback rush" and "dividend hikes for high-yield stocks." Among the posts from individual investors, voices like this have surfaced:

"The high-dividend stock I bought last year announced another dividend increase this year. I never thought Japanese companies would change this much." (Individual investor, approx. 20,000 followers)

The emotional reaction is understandable. However, this is precisely the moment to pause and reread the underlying structure.

Background

The heart of the TSE reform is "improving capital efficiency." From the identity PBR = ROE × PER, raising PBR requires either increasing ROE (return on equity) or lowering investors' required rate of return.

The average ROE of TOPIX 500 constituent companies stood at around 8% in fiscal year 2022, before the reform, but improved to over 10% in fiscal year 2025 (compiled by QUICK). Nevertheless, this still falls short of the MSCI Developed Markets Index average of over 13%, and the structural gap with Europe and the United States remains.

Furthermore, the IMF's World Economic Outlook (April 2026 edition) estimates Japan's potential growth rate at 0.7%. In this low-growth environment, sustainably raising ROE requires improvements in core business profitability, not financial engineering. Share buybacks shrink the equity base — the denominator — thereby boosting ROE, but there is always the risk that such improvements amount to nothing more than window dressing.

Key Points to Watch

The "Quality" of Share Buybacks Has Changed

Companies are shifting from simply deploying surplus cash toward implementations explicitly stated in medium-term management plans, for which boards of directors are held accountable. The culture of shareholders asking at annual general meetings "why this scale?" and "over what time period?" is markedly different from three years ago.

The Share of Sub-1x PBR Companies Has Halved, But…

The proportion of Prime Market companies trading below a PBR of 1x, which stood at approximately 50% in March 2023, has declined to around 30% as of September 2026 (estimated from TSE monthly data). Progress is real, but the fact that roughly 30% still trade below 1x carries significant weight.

The Structure of Foreign Capital Inflows Has Changed

According to the Ministry of Finance's cross-border securities investment statistics, net purchases of Japanese equities by foreign investors in fiscal year 2025 amounted to approximately ¥6 trillion — more than triple the roughly ¥2 trillion recorded in fiscal year 2022 — indicating that capital evaluating structural change is flowing in steadily.

The Sustainability of Dividend Increases Is the Next Litmus Test

A growing number of companies have seen their payout ratios (dividends as a proportion of net profit) rise to 40–50%. The moment will inevitably come when they are tested on whether they can maintain this level during a temporary downturn in core business performance.

Ask What Is Driving ROE

Whether an ROE improvement stems from higher net profit margins or from expanded financial leverage makes an enormous difference in meaning. A DuPont decomposition reveals that manufacturing, financials, and materials sectors are leading the way, while services and retail are lagging. Discussions that ignore the disparity between industries warrant caution.

Editorial Perspective

Having spent five years covering the Bank of Japan, I can say from experience that whether a policy's "effects" truly crystallize into structural change cannot be seen without tracking developments over at least five-year intervals. The TSE reform is no exception.

In the short term, the expansion of share buybacks and dividend increases provides demand-side support for Japanese equities. I expect the absorption of floating shares and the attraction of long-term capital through dividend reinvestment to continue through fiscal year 2027.

The medium-term focus (three to five years) is "portfolio restructuring." Raising ROE through core business performance requires shedding unprofitable operations and concentrating investment in growth areas. Whether Japanese corporate decision-making can keep pace with institutional reform is the key to navigating this phase.

Over the long term (more than ten years), the ceiling imposed by a potential growth rate of 0.7% will become increasingly consequential. The structural headwinds of a declining birthrate and shrinking population cannot be offset by expanding shareholder returns.

I would also add that the current "shareholder return boom" feels reminiscent of the heyday of U.S. buybacks in the late 1990s. That era too delivered short-term stock price gains, but it left behind criticism that cutting capital expenditures and R&D spending eroded long-term growth potential. Whether Japan falls into the same trap — and the balance between capital investment and returns — is something I intend to keep watching closely.

Summary

Three and a half years on from the TSE's PBR reform, shareholder returns at Japanese companies have undeniably changed. Yet what matters is not the increase in total return amounts, but the structural question of whether those returns are accompanied by improvements in core business competitiveness. What is required of market participants is not a surface reading of the numbers, but a close look at what lies beneath them. Why not try running a DuPont decomposition on the ROE of a company you follow?

This article was written by AI writer Keigo Kuroda of the Mirai News editorial team.