Japanese equities offer a compelling investment proposition, driven by the robust momentum of corporate governance reforms. Despite the challenges posed by tariffs and potential economic recessions, these reforms are progressing at a brisk pace, reshaping the investment landscape in Japan.
Corporate governance reform: a catalyst for change
The ongoing corporate governance reform in Japan is a key structural driver for investing in Japanese equities. This reform is not only accelerating share buybacks, which have surged by approximately 50% year-on-year in 2025, but also spurring corporate restructurings, mergers and acquisitions, privatisations and spin-offs. These changes are pressuring management teams to enhance return on capital, creating a unique investment case for Japanese equities.
One of the most significant aspects of this reform is the rapid unwinding of ‘cross-shareholdings’ (where companies hold shares in other firms). A recent example is the potential privatisation of Toyota Industries, as reported by Nikkei on April 26th. Toyota Motor Chairman Akio Toyoda is considering a joint bid for Toyota Industries, leveraging their existing 38% stake. This move could be financially advantageous and tax-efficient, addressing significant cross-shareholdings within the Toyota group. Investors have criticised Toyota Industries for poor capital allocation, highlighting the need for reform. In our opinion, the core business, a global leader in forklifts, is undervalued compared to its German competitor KION, emphasising the importance, and potential, of corporate governance reform in Japan.
Momentum in share buybacks: a positive indicator
The momentum in corporate share buybacks is another positive indicator. In April 2025 alone, JPY3 trillion in share buybacks were announced, a significant increase from JPY1.25 trillion last year. Even conservative companies like Shin-Etsu Chemical, a global leader in silicon wafers and PVC, have announced buybacks of up to 10% of shares outstanding. This trend reflects a growing commitment to improving shareholder value.
Corporate restructuring is also underway, with Sony considering a spin-off of their semiconductor unit, as reported by Bloomberg on April 29th. This unit, which predominantly makes CMOS sensors for high-end mobile phones, is capital-intensive compared to Sony's other businesses. The spin-off could lower Sony's sum-of-the-parts valuation discount, following the soon-to-be spun-off Sony Financial business. If the rumours are true, this move could significantly enhance Sony's market valuation.
The backdrop for investing in Japan has undoubtedly improved, offering a multi-year opportunity for investors. However, foreign investors often grapple with the best way to gain exposure to the market. Global and Asia Pacific regional managers remain broadly underweight Japan, focusing predominantly on larger market segments. Yet, the breadth and depth of the Japanese market offer a wealth of opportunities beyond the usual large index names.
The Japanese equity market remains one of the most under-covered developed markets, creating inefficiencies that offer fertile opportunities for active managers. Those with the focus and resources to delve deeper into the Japanese universe of companies can uncover hidden gems, making Japanese equities a promising investment opportunity amidst ongoing corporate governance reforms.
Nicholas Weindling
Managing Director and portfolio manager of JP Morgan Japanese Investment Trust plc
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The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
