Kishida floats buyback regulations, spooking Japanese stocks

Kishida said introducing "guidelines" on buybacks would be appropriate, in response to a question in parliament from opposition lawmaker Takayuki Ochiai. The Japanese 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 Nikkei 225 Stock Average fell as much as 1.2% in afternoon trading before paring declines to close down 0.7%. SoftBank Group Corp., which has long used stock repurchases and is currently in the process of a 1 trillion yen ($8.8 billion) buyback program, dropped as much as 1.6%, and finished 0.9% lower.

"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.

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

Stock repurchases by Japanese companies are expected to rise 50% this fiscal year to more than 7 trillion yen, 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."

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.