Prime Minister Fumio Kishida indicated he could consider writing guidance for companies on share buybacks, triggering a dip in the nation’s stock market that’s been boosted by such repurchases in recent years.

Kishida said Tuesday introducing "guidelines” on buybacks would be appropriate, in response to a question in the Diet from opposition lawmaker Takayuki Ochiai. The premier added that caution would be needed in implementing any strict regulations.

The comments come as investors watch for a different approach from Kishida after a series of shareholder-friendly reforms started under former Prime Minister Shinzo Abe. Kishida came to office earlier this year pledging to roll back what he called "neoliberal” measures of the past two decades, with a greater focus on narrowing the gap between rich and poor.

"If buybacks become subject to restrictions, that will cap the upside in share prices,” said Tatsushi Maeno, senior strategist at Okasan Asset Management Co. But "it’s unclear whether a guideline will actually be put together.”

The 225-issue Nikkei stock average fell as much as 1.2% in afternoon trading on the day before paring declines. SoftBank Group Corp., which has long used stock repurchases and is currently in the process of a ¥1 trillion ($8.8 billion) buyback program, dropped as much as 1.6%.

"I wonder if it would be possible to consider a response that takes into account the circumstances of individual companies, such as introducing guidelines,” Kishida said. Ochiai had suggested Japan should review its share buyback rules or ban repurchases altogether.

Prime ministers regularly take questions from lawmakers on various topics in parliament, and the responses don’t necessarily mean they will take that policy direction.

Neoliberal reforms

Share buybacks surged in Japan under the Abe administration, who implemented a corporate governance code for companies to make them more responsive to shareholders and encourage them to improve investor returns.

The Tokyo Stock Change took a hit Tuesday following comments from Prime Minister Fumio Kishida alluding to reforms to the Abe-era expansion of corporate stock buyback practices. |  REUTERS
The Tokyo Stock Change took a hit Tuesday following comments from Prime Minister Fumio Kishida alluding to reforms to the Abe-era expansion of corporate stock buyback practices. | REUTERS

Stock repurchases by Japanese companies are expected to rise 50% this fiscal year to more than ¥7 trillion, according to an analysis by Tokai Tokyo Research Institute Co.

But such buybacks were banned in Japan for decades, only becoming allowed in 2001. Opposition lawmaker Ochiai said in parliament that deregulation of stock repurchases had allowed companies to favor shareholders over employees.

"It’s possible that some kind of guidelines could be considered,” said Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management. "While it’s fine if buybacks come from profits, in recent years many companies buy back shares to offset stock declines after losses, or do repurchases using debt.”

Kishida shock

It’s not the first time Kishida’s promises to introduce a "new form of Japanese capitalism” have spooked markets.

Early in his administration, talk of capital gains taxes led to a dip in the Nikkei 225 that was termed the "Kishida shock.” While Kishida shelved that plan, his subsequent stronger-than-expected showing in a general election has led to talk of taxing financial income being revived.

Kishida has also called for tax breaks for companies that raise wages rather than dividends, though he hasn’t previously openly commented on regulating buybacks.

The ruling Liberal Democratic Party on Friday unveiled a set of carrot-and-stick incentives to use the tax code to prompt businesses to raise worker pay and penalize those that don’t.

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