Key Highlights:
- The number of outstanding shares in Japan is steadily declining, driven primarily by ongoing share buybacks and the unwinding of cross-shareholdings.
- Cross-shareholdings — legacy shareholdings between companies to maintain business ties — have been decreasing since the 1980s, accelerated recently by companies actively buying back and retiring their shares.
- This structural reduction in supply is making Japanese equities increasingly attractive amid tighter equity supply-demand dynamics.
Historical Context of Supply and Demand
- 1980s Bubble: Corporates and financial institutions, including banks, were major net buyers until the bubble burst in 1990.
- 1990s–2000s: Corporate pension funds became significant equity investors due to raised retirement ages and eased investment regulations.
- Late 1990s–2010s: Foreign investors grew their holdings substantially, increasing Japan’s exposure to international capital flows.
- 2010s–early 2020s: The Bank of Japan’s unprecedented monetary easing and large-scale ETF purchases propped up the market.
- Since 2022: Nonfinancial corporations have become the largest net equity buyers, steadily unwinding cross-shareholdings and increasing buybacks.
Cross-Shareholdings and Buybacks
- Broadly defined cross-shareholding ratios have steadily fallen, currently around 8% and declining by about 0.3–0.5 percentage points per year.
- Annual share buybacks now exceed the pace of cross-shareholding unwinding, equating to about 1–1.5% of market capitalization.
- This signals a net reduction in the total number of shares outstanding, improving capital efficiency and market attractiveness.
Growing Investor Base and Market Attractiveness
- Activist funds are increasing exposure, owning nearly 1% of total market cap, contributing to enhanced corporate governance and M&A activity.
- Japanese households and investment trusts are shifting from cash and deposits to equities, supported by expanded tax-advantaged schemes like NISA, with net equity purchases exceeding ¥1 trillion since early 2024.
- Nonfinancial corporations maintain high shareholder returns through dividends and buybacks, driving earnings per share growth.
Outlook: Tight Equity Supply
- Given abundant corporate cash, higher after-tax profits, undervaluation perceptions, and pressure from shareholders and regulators, share buybacks are expected to remain elevated in 2025, forecast at ¥17.5–18.5 trillion.
- The continued reduction in share supply amid stable or growing demand from institutional investors, households, and activists suggests a structural tightening of Japan’s equity market.
- This dynamic supports potential upward pressure on stock prices and improved market liquidity and efficiency.
Conclusion
Japan’s equity market is undergoing a fundamental structural change — shares are literally disappearing through buybacks and unwinding of entrenched cross-shareholdings. This evolution enhances capital discipline, supports higher shareholder returns, and improves the attractiveness of Japanese stocks for both domestic and global investors.
As supply tightens and demand strengthens, Japan may enter a new investment era marked by greater market efficiency and renewed interest from a diverse investor base.
