Breaking Language Barriers: How TSE's New Rules Are Reshaping Japan's Market Transparency

Foreign investors now have unprecedented access to Japan’s corporate data.

The recent, albeit short-lived, meltdown of yen carry trade likely caught your attention, especially if you follow Japan's stock market. With the Bank of Japan taking its first steps towards normalcy by ending yield curve control and negative interest rates; the stock market seemingly unchanged for three decades, suddenly went in flurry taking global markets along for the ride.

As Japan's stock market garners the global attention it deserves, several reforms have already been put in place to sustain this newfound attention. Tokyo Stock Exchange (TSE) is adopting global standards with a focus on transparency and accessibility. But what exactly has changed, and what does this mean for investors?

What Has Changed?

For years, lack of comprehensive English disclosures has been a significant barrier for foreign investors interested in Corporate Japan. To be fair, a handful of companies, had already been publishing brief summaries in English, but these were just that—brief—and often excluded critical information found in the Japanese versions of the disclosures.

Starting April 1, 2025, companies listed on the Prime segment of TSE will be required to simultaneously disclose key information in English. The necessary listing rules have already been amended, signalling a shift towards greater transparency.

What Does "Key Information" Mean?

In typical Japanese fashion, the term "key information" is somewhat vaguely defined. The TSE appears to be testing the waters, gauging how much of a burden it will end up imposing, requiring simultaneous English publication of all Japanese disclosures.

For now, companies are required to publish the following in English:

• Earnings Report【決算短信】
• Earnings Presentation【説明資料】
• Any information that could materially impact investment decisions, such as earnings forecasts, mergers and acquisitions, and leadership changes.

What Hasn't Changed?

Despite these advances, some critical documents are still not required to be published in English. These include Notice of the AGM, Corporate Governance Reports and most important of it all, Annual Report【有価証券報告書】.

TSE Chief Yamaji Hiromi-San is re-modelling the Japan's stock market one room at a time, but there is still long way to go. Judging by his determination, however, it seems he is not slowing down anytime soon.

Does It Really Change Anything?

For the average investor, these changes might not seem ground-breaking. Granted that the English disclosures of earnings report & presentations are not nearly as comprehensive as annual reports, they do provide a lot of essential information timely. This move makes the financial information more accessible for those who wish to dip their toes into Japan's economic narrative, and it enhances transparency for those who are already invested.

What It Means for Investors?

This reform levels the playing field for overseas investors, who make up 70% of trading on Prime segment by value. The absence of timely English disclosure previously created an unfair advantage for those who could grasp Japanese disclosures, leading to asymmetric information, and restricting deeper engagement from overseas investors. As a result, many investors were compelled to stick with index-tracking products such as TOPIX or Nikkei225, rather than delving into individual stocks.

What It Means for Corporate Japan?

This change sends a clear message that Japan is aligning with global best practices, with an emphasis on strategic communication with international stakeholders. In other words, Japan has now opened the doors of the stock market playground for overseas investors, allowing them to participate with renewed confidence. This will undoubtedly influence Japan's financial ecosystem and appeal to a broader spectrum of investors.

However, this change inevitably also widens the door for activist investors, should they choose to engage. Barring rare occasions, Japan has not yet witnessed the kind of shareholder activism seen in the U.S., but this change could mark the beginning of a shift in that direction.

How is Corporate Japan Handling It So Far?

Based on my review of the English disclosures from around 300 companies over the 夏休み, Corporate Japan appears to be handling the transition fairly well. Prime segment companies have been hiring bilingual accountants for years, —at least those with professional working proficiency in English. Seasoned middle managers, semi-bilingual team members, and external consultants or translators are pulling together to meet these new requirements.

A new tool in the shed, LLM based Generative AI, has also contributed to efficiently translating hordes of information. However, these tools are prone to spit out BS, or "hallucinate", as they are often called. In the reports I reviewed, I noticed multiple instances vague sentences or miswording that seemed to mimic AI-generated errors. These issues, while minor, highlight the importance of a final review by someone proficient in both English and accounting to avoid embarrassing mistakes in front of the foreign investors.

Several translation and interpretation providers have already stepped up to take on the task of ongoing English disclosures. While many are doing an admirable job, others still need to improve their quality. This is undoubtedly a tough job that requires patience and persistence. Familiarizing oneself with correct English accounting terms will add significant value to the work and enhance the quality of clients' disclosures. At this early stage of the reforms, I lean more towards progress than perfection.

What It Means for Analysts?

Information brokers who traditionally provided translation of key information merely to bridge the language gap may see shift in demand for their services—except for those quick to adapt. There are new opportunities in curating and analysing English information, providing comparative analysis, and specialized data interpretation services.

Smart analysts who will revise their models to incorporate this information and include it in their reports could gain competitive advantage. They will be better positioned to offer timely and deeper insights to their clients, capitalizing on this critical change in the Japan's financial landscape.

The Prime segment shows high enthusiasm, especially for earnings reports, where 49% of companies have made the report fully available whereas 45% of companies have published excerpts of it as on July 31, 2024.

The Prime market, while notably more forthcoming in earnings reports, does not seem very enthuse about earnings presentation.

There is significant room for an improvement, particularly for earnings presentation, where only 38% of companies made it available to some extent across all segments.

Both the Growth and Standard segments seem apathetic towards English disclosure. The majority of companies in these segments do not provide English versions of their earnings reports and explanatory materials.

These disparities underline the TSE's ongoing challenge in addressing the information asymmetry problem. The Prime segment is leading the charge, but there’s a clear and pressing need for enhanced efforts across all segments, particularly in the Growth and Standard markets.

In sum

This reform marks a significant change for Japanese companies looking to attract institutional investors from around the globe. However, whether can retain these investments in the long run will depend on how well they manage strategic stakeholder communication.

I’ve seen firsthand how language barriers can limit investment opportunities. This change can be a win-win for Japan Inc. and foreign investors, but it’s essential that Corporate Japan receives the support it needs to make these transitions smoothly.

How will Japanese companies rise to this challenge? Only time will tell, but one thing is certain: the world is watching.

Disclaimer: All opinions expressed in this post are my own and do not reflect the views or opinions of my employer.