Enduring reform: Japan's ongoing shift in corporate behaviour

Three years ago, when we first made the case for Japanese equities, the idea that corporate Japan was changing for the better required some persuasion. But the country’s stock market rally of 2023, driven by genuine profit growth, confirmed what was then a contrarian stance. Now, we may be approaching another such inflection point.

The Tokyo Stock Exchange’s directives to improve economic returns and dismantle inefficient parent-child listings are bearing fruit. We are witnessing an unmistakable shift in corporate behaviour—companies once thought immovable are stirring at last, aggressively buying back shares and dissolving old-world corporate shareholding structures.  

Consider Toyota Industries and its 9% shareholding in Toyota Motors; a textbook example of a valuation distortion created by Japan’s labyrinthine cross-shareholdings. 

If media reports are to be believed, this distortion may soon be corrected. Toyota Motor Chairman Akio Toyoda’s rumoured takeover bid for Toyota Industries, if real, would represent a deft and commendably audacious resolution¹. 

The price offered will matter greatly – for minority shareholders must be fairly rewarded not only for the operating business but also for the embedded value in cross-holdings and dormant assets such as real estate. The point, however, is that such a move was, until recently, unthinkable. The worm has turned. 

“Japan, for all its perceived conservatism, is being carried forward by an enduring and internally driven reform agenda.”
 

Hot on the heels of the Toyota headlines, NTT declared its intent to acquire the remaining 42% it doesn’t own of NTT Data – one of the world's largest data centre operators². The 34% premium suggests not just strategic ambition but a clear-headed view of the synergies ahead³. It's another welcome signal that Japanese corporate giants are shaking off inertia in pursuit of corporate structures that are optimised for growth.

Japan’s enduring reform

All of this serves as a timely rejoinder amid global disarray: Japan, for all its perceived conservatism, is being carried forward by an enduring and internally driven reform agenda.

The numbers speak with uncommon clarity. Share buybacks – a once-rare species in Japan – are now in full bloom. In April, Topix-listed firms announced ¥3.8 trillion in buybacks, nearly triple the ¥1.3 trillion from a year earlier. The total for the year has already reached ¥6.9 trillion, more than twice the level at this point in 2024⁴. 

That such a figure emerged in the first month of the fiscal year suggests that balance sheet optimisation remains high on the agenda, regardless of macroeconomic turbulence.

By mid-2023, global investors were lamenting having missed the Japan rally. Yet the rally endured, pushing equities more than 30% higher. As of May 1, 2025, the Japanese market remains roughly 10% below its July 2024 peak – but in many respects the fundamentals, and certainly the corporate mindset, have continued to improve. Governance reform and shareholder returns, far from peaking, are scaling new heights, in our view.

Curiously, foreign investors – despite pouring US$25.5 billion into Japanese equities in April alone – remain net sellers year-to-date. It is, perhaps, another echo of 2022, when underweight positions were similarly reinstated just before the market surged.

In a global investment landscape riddled with distortions and danger, Japan stands apart. Its progress is neither flashy nor fast – but it is unmistakably real. For the patient and perceptive, it offers a rare prize: a market undergoing quiet, systemic transformation – imperfect, yes, but relentlessly improving.

¹ Bloomberg, ‘Toyota Industries shares surge on Akio Toyoda buyout proposal’, (bloomberg.com), April 2025.
² Enterprise Times, ‘NTT is redefining its global data centre strategy’, (enterprisetimes.co.uk), April 2025.
³ Reuters, ‘Japan’s NTT plans to take NTT Data private for $16.4 billion’, (reuters.com), May 2025.
⁴ FT, ‘Japan’s share buybacks nearly triple as governance push gains pace’, (ft.com), May 2025.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.