The Era of Disappearing Shares

In Japan today, it is almost as if shares are disappearing into thin air.

Cross-shareholdings—shares that a company holds in another, not for pure investment purposes but to maintain a relationship with its business partner—began in Japan in the 1980s and are a negative legacy of the period. But share-buybacks, a trend that began in 2022 and picked up in 2024, have facilitated the unwinding of these cross-shareholdings. Share buybacks now exceed share issuance, and those shares purchased from the market are being retired.

This is helping to improve money flows and making the Japanese equity market more attractive.

A Brief History of Supply–Demand Changes in Japan

How did this situation arise?

Over the past four decades, the main drivers of supply and demand have changed, and the stock market has fluctuated along with these changes. Below, we summarize the key drivers:

• In the latter half of the 1980s: An economic bubble formed as a result of equity investment (money management investment) by companies and financial institutions. Data on trading by investor category shows that from 1985 through to the end of 1989, banks, including trust banks, were major net purchasers by ¥22 trillion, in line with the rise in the TOPIX. However, this purchasing trend ended at the beginning of 1990 with the bursting of the bubble.
• From the mid-1990s to the early 2000s: There was an inflow of pension money. Once the retirement age was raised from 55 to 60 in the 1990s, more companies began to set up corporate pension schemes. At the same time, investment regulations were eased, leading to increased investment in equities by corporate pension funds. However, these inflows eventually ran their course.
• From the second half of the 1990s to the 2010s: There was an inflow of money from overseas investors, focusing on international blue-chip stocks. This prompted a shift to markets determined by nonresident investors. The nonresident investor ownership ratio rose from 8.1% in FY1995 to 21.8% in FY2004, making it Japan’s largest investor category.
• From the second half of the 2010s to the early 2020s: The BOJ implemented an unprecedented monetary easing policy. It also increased its ETF purchases, which went up to ¥1 trillion a year in 2013, followed by ¥3 trillion a year in October 2014 and ¥6 trillion a year in July 2016. When faced with the COVID-19 pandemic in March 2020, the BOJ increased this to up to ¥12 trillion a year. ETF purchases were scaled back in 2021 and halted in March 2024.
• Since 2022: Nonfinancial corporations have become the largest net purchasers. Their substantial and stable net buying has reduced the impact of nonresident investors’ trading behavior. It is also now easier to unwind cross-shareholdings.

The Unwinding of Cross-Shareholdings Continues

Since peaking in the mid-1980s, broadly defined cross-shareholding ratios have continued to fall. We estimate that the narrowly defined cross-shareholding ratio is around 8% and is on a downward trajectory with declines of around 0.3–0.5 percentage points a year. However, given that annual share buybacks are equivalent to 1–1.5% of market cap, we believe it is fair to say that share buybacks are exceeding the unwinding of cross-shareholdings.

Broadly defined pure investor ownership rose from 28.2% in FY1986 to 59.9% in FY2023. This resulted in greater discipline among corporate managers. It also made it easier, following the Tokyo Stock Exchange’s request in the spring of 2023, for management to become more conscious of the cost of capital and stock price.

Increasing Attractiveness of Japanese Equities

We estimate that Japanese equities currently account for around 5.2% of global market cap and for 4.0–4.5% of nonresident investors’ holdings.

Since 2023, weekly data has shown that Japanese equities have occasionally exceeded the attractiveness of Asian equities, though this has not lasted long.

We see plenty of scope for a reassessment of Japanese equities if investors were to understand that the changes taking place in the Japanese economy (the move out of deflation) and at Japanese companies (corporate governance reforms) are likely to be structural and long-lasting.

Growing Interest From Activist Funds

Activist funds have been increasing their exposure to Japanese equities to the tune of ¥9.5 trillion, or 0.98% of total market cap, based on a universe of Japanese stocks for which activist ownership data is available. This ownership ratio has been rising year by year.

Given that inflows haven’t abated, we see scope for further increases. This has resulted in greater discipline among corporate managers and is linked with increased M&A activity.

Japanese Companies Maintaining High Shareholder Returns

When corporate managers oversee operations with an awareness of stock prices and cost of capital, it is inevitable that they will be required to properly manage capital structure and shareholders’ equity ratios. Japanese companies’ shareholder equity ratios are generally high. As a result, a growing number of companies have announced an intention to maintain high shareholder returns over the next several years to avoid surplus capital.

We expect total payout ratios at listed Japanese companies to continue to face upward pressure, based on comparisons with global levels (median of 70–80%). Share buybacks reached around ¥16 trillion in FY2024, and we expect them to remain high in FY2025.

Against this backdrop, nonfinancial corporations’ net buying of Japanese equities is moving in tandem with the TOPIX. We also think that annual share buybacks equivalent to just over 1% of market cap are likely to boost earnings per share.

Japanese Households and Equities

Cash and deposits, which were suitable assets during the move out of deflation, are now a negative returning asset due to inflation.

Against this backdrop, banks have been recommending that Japanese households consider balanced funds that include equities and risk assets, and we think this is a regime shift. It makes sense for banks with low loan–deposit ratios as it promotes earnings diversification and generates fee-based business. It also has social significance for households as it means they are taking steps to deal with inflation.

Japan’s new NISA scheme for tax-free investments—which was expanded to ¥3.6 million per account per year in 2024 (¥18 million in total over five years)—has gotten off to a solid start again in 2025, its second year. Net purchases of Japanese equities by households and investment trusts since the start of 2024 have exceeded ¥1 trillion.

The Number of Outstanding Shares Will Continue to Decrease

From a longer-term perspective, we think equity supply–demand is likely to remain tight, based mainly on the high level of share buybacks.

The increase in share buybacks in recent years can be attributed to a mix of factors, including growth in after-tax profits, plentiful cash and deposits, companies seeing their own shares as undervalued, and progress with corporate governance reforms.

If we look at the characteristics of companies that carried out share buybacks in 2024, in addition to having plenty of financial headroom, they faced pressure from shareholders in the form of high nonresident ownership ratios and activist fund ownership, and they were complying with the TSE’s requests. Their track records, whether they had previously carried out share buybacks, were also a factor.

As many of these conditions remain, we forecast that share buybacks in 2025 will continue and be between ¥17.5–18.5 trillion.

And we expect the era of disappearing shares to continue.