Japan’s capital revolution: a new era for active investors

A quick recap

The appointment of Prime Minister Sanae Takaichi has brought political stability after a period of uncertainty. While the era of Abenomics is firmly behind us, the current policy trajectory remains intact, focused on domestic revitalisation, productivity, and capital efficiency. Inflation and wage growth are returning, prompting a shift in the Bank of Japan’s regime and fuelling a new domestic investment cycle.

At the same time, Tokyo Stock Exchange (TSE) reforms, the expansion of Nippon Individual Savings Account (promoting a shift from saving to investing), and the Green Transformation Policy are reshaping the investment landscape. Corporate capital expenditure sentiment is stable, and the outlook for Japan’s equity market is increasingly positive.

TSE reforms: unlocking value in world-class businesses

One of the most powerful drivers of change is the TSE’s push for capital market reform. Companies are now under pressure to improve returns, with “naming and shaming” already underway. This is forcing a rethink of capital allocation, governance, and shareholder engagement.

The problem is clear: around half of TOPIX constituents trade below their book value. Many suffer from inefficient structures, excess cash, and underperforming subsidiaries. Japan has long had the weakest return on capital among major markets – not due to poor governance, but rather widespread capital misallocation.

The solution is gaining traction. Since 2014, corporate governance codes have improved. Now, with the TSE’s 2025 delisting deadline fast approaching, companies are responding with special dividends, share buybacks and a renewed focus on productivity and sustainable growth.

Disciplined capital allocation is critical. Value-destructive mergers & acquisitions, excessive cash hoarding, and reckless expansion dilute returns. By contrast, returning cash to shareholders enforces discipline, aligns management with investors and supports long-term compounding. We favour cash dividends over buybacks for their permanence and reliability.

How does this look in practice?

JX Advanced Metals exemplifies the opportunities emerging from Japan’s reform agenda. In March 2025, the company launched on the Tokyo Stock Exchange, priced attractively at a low teens price-to-earnings multiple given its growth outlook. Parent company Eneos listed the subsidiary to sharpen its focus on return on invested capital and shareholder returns. It will use the initial public offering (IPO) proceeds to fund growth and capital distributions.

JX Advanced Metals operates an integrated production process for high-purity metals used in advanced chip manufacturing. It holds a 60% global market share in sputtering targets, which are critical components in AI-driven semiconductor production. The company also leads in niche materials like alloys and substrates, with demand surging for AI server applications.

The IPO marked a strategic pivot, from energy and smelting to tech-oriented growth. Despite limited visibility under Eneos, the company was well-received by tech investors. It plans to invest ¥150 billion in its first new plant in 40 years, aiming to double profits in its chip materials segment by 2040.

This is a textbook example of reform unlocking value – a world-class business, now publicly listed, with a clear growth path and disciplined capital strategy.

Investment companies have a critical role to play in Japan’s corporate overhaul. Meeting with management teams allows them to encourage better capital discipline and more shareholder-friendly policies. For our part, we’ve engaged with Asahi Group and Keyence.

Bottoms up to buybacks

We regularly engage with beverage maker Asahi Group on its capital allocation. Last year, it raised its dividend payout ratio from 35% to 40% – a move originally planned for end-2025 but brought forward due to progress in deleveraging.

Asahi is also actively buying back shares, with the total payout ratio expected to exceed 80% this year. We welcome the management team’s flexibility in adjusting capital allocation based on business outlook, investment plans, balance sheet strength and cash flow. This discipline is especially important given Asahi’s highly cash-generative profile.

Power of the vote

Keyence, a leading automation solutions provider, remains a high-quality business with market-leading margins and robust free cash flow. However, we see scope for improvement in capital allocation, particularly in shareholder returns.

At June’s annual general meeting, President Nakata secured 77% shareholder support for re-election as director, down from 83% the previous year. As of end-March, the company held ¥2.7 trillion in cash and equivalents – around 20% of its market capitalisation and 86% of net assets – yet maintained a modest dividend payout ratio of just 22%.

We’ve raised our concerns through proxy voting and continue to engage with the company to advocate for a more progressive capital policy. Encouragingly, Keyence announced in October a forecast dividend increase from ¥350 to ¥550 for the financial year ending March 2026. A step in the right direction.

Final thoughts…

Japan’s outlook is compelling. Political stability and structural reforms are driving a new era of corporate discipline and capital efficiency. The TSE reforms are forcing companies to reassess their approach to capital management. Many world-class businesses are now trading at significant discounts to their long-term potential as a result.

For active investors with a high-quality mindset, Japan offers a rich and fertile backdrop. The transformation is real. The opportunity is here.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.