Toyota’s bold move marks a new era in Japanese corporate governance

On 3 June 2025, Toyota Group announced a major deal to dissolve its cross-shareholding structure.¹ This adds to the significant progress already made towards Japanese corporate governance reform. The commitment by the largest Japanese corporation is symbolic, marking a momentous day for investors in Japanese stocks.

Toyota Motor Corporation was emblematic of ‘corporate Japan,’ reflected in its post-war Japanese economic characteristics through its cross-shareholding structure. While cross-shareholdings had the benefit of stabilising relationships between companies, it also made proper pricing of goods and services difficult, diminished capital efficiency for Japanese companies, and reduced corporate transparency.

Government reform initiatives begin to blossom

In recent years, government initiatives have increased awareness of the governance issues that these structures posed, accelerating the divestment of cross-held stocks. Insurance companies are a prime example, with plans to sell all their cross-held stocks within the next six to seven years. The proceeds of which have been pledged towards enhancing shareholder returns through dividends or share buybacks. This has enabled the setting of fairer insurance premiums independent of corporate relationships, improving profitability in core businesses. Consequently, we have seen the Tokyo Stock Exchange Insurance Index return about three times its value over the past five years.²

A symbolic move by the bellwether for corporate Japan

Toyota had been gradually dissolving its shareholding structure, but a significant hurdle was the presence of Toyota Industries Corp (formerly Toyota Automatic Loom Works), the foundational company and de facto holding company of the group. The treatment of Toyota stocks held by Toyota Industries and its governance issues needed to be addressed to fully assess Toyota’s reform efforts. Toyoda, the group’s founding family, has made immense contributions to the group, and while their shareholding is small, their influence on management is significant. Speculation had arisen that the Toyoda family might strengthen their management involvement by acquiring “golden shares” (that grant veto power over key company decisions) for Toyoda Industries. Indeed, a month ago, reports surfaced about a possible takeover bid by the Toyoda family for Toyota Industries with co-investment by group companies, raising concerns that this could be a significant setback for Japanese governance reform.

Pleasingly, the recent announcement contradicts these concerns, and clearly shows that pursuing governance reform is based on “the logic of capital” (capital accumulation to pursue profit). The deal specifies that about 9% of Toyota shares held by Toyota Industries are planned to be acquired by Toyota through share buybacks and will subsequently be retired. Additionally, Toyota Industries will repurchase and retire its own shares held by Toyota Motor. Other motor parts supplier companies are also expected to follow this move, effectively closing any indirect routes of influence to Toyota Motor Corporation.

Shareholder returns look set to improve

Japanese corporate governance reform is advancing rapidly and irreversibly. Currently, profits and surplus funds used to facilitate share buybacks from dissolving cross-shareholdings are expected to eventually serve as sources for dividends, returning profit to shareholders. With current dividend payout ratios in Japanese companies being over 30%, similar to the proportion used for share buybacks, there remains substantial room for further dividend increases.³ Consequently, we believe the Japanese market can see dividend growth outpacing earnings growth, supporting the case for Japanese stocks as an attractive long-term investment.

¹ Financial Times, ‘Toyota to buy out key supplier in $33bn take-private deal,’ 3 June 2025.

² Bloomberg; TOPIX Insurance Index (TPINSU), 5 years to 31 May 2025. Past performance does not predict future returns. The TOPIX Insurance Index is a capitalisation-weighted index designed to measure the performance of the insurance sector of the TOPIX Index (TPX).