Nidec headquarters in Minami Ward, Kyoto
Japan's stock market still suffers from several structural shortcomings. Few, however, are as troubling as the reflexive tendency to fault investors for losses they did not cause. Recent developments involving Nidec have brought renewed attention to this problem.
Losses are sometimes dismissed as the predictable result of reckless enthusiasm for investing, rather than as the consequence of corporate misconduct.
This attitude is particularly evident in cases where share prices plunge following accounting irregularities at listed companies. If Japan is serious about positioning its stock market as a pillar of long-term asset formation, there is an urgent need to establish mechanisms that prevent small, individual investors from being left to absorb losses in silence.
Accounting Problems and Share Price Collapse
Figure 1 illustrates the share price trajectory of Nidec, which has come under scrutiny for improper accounting. On May 29, the company disclosed delays in audits of its overseas subsidiaries, bringing documentation deficiencies to light. Subsequent revelations of accounting irregularities further exposed the widening scope of the company's underlying problems.
Nidec's share price suffered sharp declines on three occasions: September 4, October 28, and November 17. The first drop followed the company's announcement the previous day that potential accounting irregularities had been identified at both the parent company and several group subsidiaries. That was followed by a second plunge after the Tokyo Stock Exchange designated Nidec shares as a "Security on Special Alert." The final decline came as selling accelerated in response to the company's earnings results for the April–September 2025 period.
Rise of a Market Favorite
Founded in 1973 in a six-tatami-mat room of his home, Nidec was built by its founder and owner-manager, Shigenobu Nagamori, into a company with a market capitalization approaching ¥9 trillion JPY ($60 billion USD) by February 2021. Through a series of acquisitions and turnarounds of struggling businesses, Nagamori forged a reputation for decisive leadership. While his management style drew mixed reactions, there is little doubt that Nidec came to be seen as one of the companies energizing Japan's economy, and it enjoyed strong popularity among investors. On December 19, Nidec announced the resignation of Nagamori as chairman and CEO.
Governance Concerns Emerge
Although a third-party committee is still investigating the full extent of the matter, allegations that improper accounting may have involved company directors inevitably cast doubt on Nidec's suitability as a listed firm. The company's market capitalization has fallen to around ¥2.3 trillion ($15 billion), roughly one quarter of its peak. It remains unclear whether the share price has bottomed out.
In response to the sharp decline in Nidec's stock, overseas law firms have already begun exploring the possibility of filing class-action lawsuits seeking compensation for investor losses. While no such litigation has yet emerged in Japan, large institutional investors are expected to consider action in due course, driven by their fiduciary responsibilities.
Barriers for Individual Investors
For ordinary individual investors and other small domestic shareholders, however, the barriers to recovering losses are substantial. Many are ultimately left with little choice but to absorb those losses without recourse. There are several reasons for this.
First, even when litigation is pursued, Japan lacks an American-style class-action system. Instead, investors must band together to form a group of plaintiffs and jointly file suit. In the United States, by contrast, an opt-out system applies. Unless individuals explicitly decline to participate, court rulings automatically extend to all who suffered similar losses, entitling them to compensation. Japan, by contrast, operates an opt-in system. This means investors must actively join a lawsuit as named plaintiffs to receive compensation, even if the case is successful.
Legal System Constraints
Second, Japan lacks a discovery system comparable to that of the US. In American civil litigation, parties can compel the opposing side to disclose evidence before trial, with enforcement mechanisms and penalties for noncompliance. Although Japan introduced a similar framework in a 2004 revision of its Code of Civil Procedure, it lacks meaningful coercive power or sanctions and is therefore widely regarded as ineffective.
Third, past cases suggest that Japanese courts tend to award compensation for only a limited portion of the losses investors incur from share price declines. In Nidec's case, for example, the company was excluded from stock indices after being designated a Security on Special Alert, prompting large-scale selling by institutional investors following index-linked strategies.
It remains uncertain whether Japanese courts would attribute such mechanically driven declines to corporate misconduct. Compared with the US, where punitive damages are available, the potential recovery for plaintiffs in Japan is modest.
As a result, many individual investors conclude that even if they take the time and effort to participate in litigation, the compensation they receive is unlikely to be commensurate with their losses, including the cost of litigation. Whether those losses arise from flawed investment decisions or from corporate wrongdoing, they are often dismissed as little more than "bad luck."
Implications for Market Reform
As shown in Figure 2, cases of improper accounting and accounting fraud continue to rise in Japan. If no effective system exists to compensate investors harmed by misconduct at listed companies, investing in stocks risks becoming little more than a case of buyer beware.
The government has promoted a vision of Japan as an "asset-management nation," expanding the tax-exempt NISA program to encourage broader participation in securities investment. From the standpoint of the legal system, however, this effort must be matched by measures that reduce the opportunity for deception and misconduct in the market.
Japan should not, of course, attempt to import the US class-action system wholesale, given differences in social and legal structures. Even so, there is little doubt that a stronger legal framework is needed ー one that places greater emphasis on protecting individual investors and minority shareholders.
The Nidec case may yet serve as a catalyst, prompting law firms experienced in securities litigation to ignite a broader debate over the need to reform Japan's existing system.
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Author: Masataka Maeda
Chief Writer, Market Journalist, Market Essential LLC. Born in 1957. In 1979, he graduated from the College of Arts and Sciences, the University of Tokyo, and joined Nikkei Inc. He worked as a staff writer mainly in the Capital Market and Corporate News Department before being assigned as Senior Staff Writer. He had an experience working as a correspondent at the Washington D.C. Bureau in the United States, and as Senior Economist at Japan Center for Economic Research.
After retirement from Nikkei, he set up a small LLC with his wife and sell market information through various channels.
He publishes many books about financial markets and writes articles in monthly magazines about accounting, M&A, etc.
