(Bloomberg) -- The best rally in a decade for Japanese stocks is being amplified by a surge in buyouts from company executives. 

The volume of management buyouts has increased to the highest on record this year, spurring expectations that removing weaker companies from the market may help improve valuations of listed ones. That brings into focus the Tokyo Stock Exchange’s campaign to improve corporate governance, which is underpinning bullish calls on the nation’s stocks. 

“If the MBOs result in industry reshuffles, it will have a great positive impact on the market as accumulated inefficiencies in Japan are getting fixed,” said Sho Nakazawa, a strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.

The volume of companies being taken private by executives in Japan in 2023 jumped 170% from a year earlier to at least ¥870 billion ($6 billion), according to data complied by Bloomberg. That compares with an increase of 50% globally, the figures show.

The pace picked up in November, with the most deals since December 2011. That includes Taisho Pharmaceutical Co. - the biggest MBO this year - and educational services business Benesse Holdings Inc. 

“As the cheap stocks are going away, the value of the capital market increases,” said Mitsushige Akino, senior executive officer at Ichiyoshi Asset Management Co. “This is good for the market.” 

The increase in MBOs stands to give a further boost to Japan’s world-beating performance this year, driven by investment from veteran fund manager Warren Buffett and the TSE’s campaign. 

The increase in MBOs is a result of companies properly discussing their growth and business strategies, Hiromi Yamaji, chief executive officer of the bourse’s parent Japan Exchange Group Inc., said at a briefing last month. He added that trend wasn’t necessarily good or bad for the exchange. 

One factor behind the buyouts has been pressure from activist investors, with hedge funds pushing Japanese companies for higher returns. Shareholder proposals jumped 19% from a year earlier to a record high, according to data from consultancy IR Japan Holdings Ltd. One recent example were calls in October by UK-based activist Palliser Capital for a Japanese railway operator to reduce its stake in Oriental Land Co., which runs Tokyo Disneyland. 

Fresh Targets

Investors are keenly focused on more potential MBO targets, with industries including retailing and chemicals in the crosshairs, said Shohya Ohkuma, CEO at Japanese advisory firm QuestHub Co., who previously worked at a Singapore-based activist fund. 

Buyouts are possible at firms where the founding family has up to 30% ownership, but acts like it has more influence over decision-making, and which have net cash or significant real estate holdings, according to Ohkuma. 

On the flipside, MBOs may not be taking into account the rights of minority shareholders. The price-to-book ratio for the Taisho Pharma deal was below a minimum standard of one, and that disregarded the rights of such investors, fund adviser Japan Catalyst Inc. said this month. In Japan, the board of directors isn’t necessarily compelled to make sure it gets the highest possible price for shareholders in the event of a takeover, Nicholas Smith, a strategist at CLSA Securities Japan Co., wrote in a note this week. 

With too many companies trading at under book value, the trend might be “a process of market normalization,” said Tsuyoshi Maruki, founder of activist fund Strategic Capital Inc. “If you stay cheap, you’ll be purchased when the discipline of the market works.” 

--With assistance from Aya Wagatsuma.

©2023 Bloomberg L.P.