Last Monday, Portfolio Manager Harvey Migotti and I (Bella Foley) returned from ten days in Japan.
Our schedule was packed: the Mizuho Japan Alpha Conference, the Launch Point Small Cap Conference, and more than 30 management meetings. Back in Sydney, we joined Daiwa’s Japan Exchange Group Conference, where we met with Hiromi Yamaji-san, CEO of the Tokyo Stock Exchange.
The contrast with five years ago was stark. Conference rooms that once sat half empty were overflowing. International investors that ignored Japan for decades were now showing up in force. And the reason is simple: change that has long been promised is finally visible in company results, capital allocation, and stock prices.
Increasing Exposure to Japan
Two years ago, Japan was just 5% of the Forager International Shares Fund. Today it is nearing 20%. That shift reflects not just what’s happening in Japan, but what isn’t happening elsewhere. US markets remain our anchor at 45% of the Fund, but valuations there are stretched. Japan, by contrast, trades on 16 times forward earnings, with half of listed companies still below book value. Cheap, under-owned, and now reforming – that’s the combination that has pulled us deeper into the market.
The turning point came in March 2023, when the Tokyo Stock Exchange demanded that companies become “conscious of cost of capital and stock price.” It sounded vague, but the effect has been profound. Yamaji-san described it as a giant snowball that had been pushed across a flat surface for years. Slow, heavy work – but now it is rolling downhill under its own momentum.
Peer pressure is doing the work. More than 90% of Prime market companies have now disclosed improvement plans. Those with credible strategies have outperformed sharply, returning 67% since March 2023, versus just 17% for those without. The market is rewarding better governance, and management teams are responding.
The numbers on capital returns are extraordinary. Buybacks doubled to ¥20 trillion in 2024, and another ¥14 trillion has already been announced this year. Dividends plus buybacks now return about 5% of market cap annually, double the US equivalent. Crucially, more companies are cancelling the shares they repurchase, locking in permanent earnings accretion.
Activism and M&A increase the Snowball Effect
Reform has opened the door to activism and M&A. Domestic investors are pushing harder, with CEO approval votes slipping toward 50% in some companies. Poison-pill defences have largely disappeared.
Foreign bids are also flooding in. Overseas firms lodged 157 takeover proposals in the first eight months of 2025, already close to last year’s record. Policy changes now require boards to give “sincere consideration” to credible offers, limiting the ability to brush them aside. For the first time in decades, Japan is an open field for corporate activity.
Demographics Forcing the Change
Japan’s demographics, usually discussed as a headwind, are in fact forcing change. More than 2.4 million SME owners are over 70, and half have no successor. Left unchecked, that would mean millions of lost jobs and a significant hit to GDP. The obvious outcome is consolidation. For listed companies with balance sheet strength, opportunities to acquire are multiplying.
At the same time, labour shortages are driving productivity gains. Wage negotiations in 2024 delivered 5% increases, the largest in 30 years. In Japan, higher wages often coincide with higher margins, as companies rationalise and modernise to cope.
This combination – governance reform, corporate activity, and demographic pressure – is what makes this Japan cycle different. The snowball has started rolling, and for investors prepared to do the work, it is gathering speed.
If you are interested in making an application into the Forager International Shares Fund, you can do so here.