Tokyo has potential to retake centre stage

Poor Tokyo. Just as Japan produces a stock market story that is neither about the weak yen (2013) or tax hike woes (2014), Shanghai steals the limelight with its momentum-driven rally. With Hong Kong also being propelled to record volumes, everyone is talking about China again.

Stories of China's frothy flotations and eye-popping valuations arguably make more lively conversation than whether companies can meet their new return on equity targets following Japan's corporate governance reforms.

But as earnings season in Tokyo picks up this week, what companies say about their plans is worth watching - setting an RoE target for a Japanese group is in itself dramatic.

Investor scepticism about Japan's ability to really change is understandable. Betting that Tokyo's cash-laden companies would do something with those funds, especially the two-fifths still trading below their break-up value, has been a losing trade for years.

Yet this latest push - a new corporate code, another for shareholders and a high-profile index based on good governance - makes clear the government's intent, even before the murmurs of tax changes to target corporate renegades. Some companies are already falling into line. Fanuc, holder of the largest blue-chip net cash pile ($8.2bn), has raised its dividend, while the second biggest hoarder, Nintendo ($7.7bn), has unveiled a strategic shift. More companies have announced buybacks during this earnings season than last year, according to Nomura.

Still more can be done: tot up the net cash in the Topix 100, excluding financials, and there is $100bn on hand, compared with $8bn in the FTSE 100 and about $45bn in the S&P 100, if the cash-rich technology sector is excluded.

ISS, the influential investor adviser, has warned that it will target company chiefs who have produced RoE of less than 5 per cent over five years. Based on calculations by brokerage CLSA, that could put management at a whopping 688 companies - 38 per cent of the Topix - at risk when annual general meeting season begins in June.

Think of the potential for dealmaking and for improved returns if rattled executives were forced into action. That would be the sort of market momentum worth talking about.

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