Japanese corporate governance reforms have led to a significant upheaval in the market, with share buybacks doubling over the past three years, and M&A deals reaching a new high of $270bn in 2025.
This has led to a strong performance from the wider market, with the Topix index up 52% over the past three years.
However, the story could have much further to run, according to David Mitchinson, CIO and fund manager of the Zennor Japanese Income fund.
Speaking to Portfolio Adviser shortly after the fund’s three-year anniversary, he pointed out that while the reforms have led to a handful of Japanese companies becoming more shareholder-friendly, there are still plenty of companies earlier in the journey that had attractive long-term potential.
Many Japanese companies have been too cautious for their own good, particularly in terms of their cash exposure, which could create significant opportunities as they start to unlock shareholder value.
“There are outstanding businesses in Japan that generate loads of cash, but still manage to cover their cost of capital,” he said. “These companies are making 10-12% returns, but they really should be making closer to 20%.”
Within Japan, some companies could employ their workforce for the next 20 years, even if they had no more orders, because they are simply sitting on that much excess cash, the manager explained.
“I think that’s taking caution a bit too far,” he said.
This trend is not confined to smaller, lesser-known companies; even some larger companies are sitting on cash piles they have yet to return to shareholders, Mitchinson said.
For example, SECOM, the largest security company in Japan, has more than $800bn in net cash, despite its stock price rising 25% over the past five years, and the business having never lost money on an annual basis since listing, according to the Zennor manager.
“The return on cash in Japan is still pretty much zero,” Mitchinson said. “So having that much cash on your balance sheet is still not a great use of shareholder capital.”
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On top of this, Japanese companies were historically very insular and tended to have many “cross shareholdings”, where most of a company’s shares were held by another part of their conglomerate, the Zennor manager explained. For example, a big bank such as Mitsubishi was often the largest shareholder in its subsidiaries, such as Mitsubishi Electric.
These internal relationships “used to be far more important than external shareholders,” leading to many companies having poor alignment with their shareholders.
Some mega-cap stocks, such as Mitsubishi, have unwound these relationships and the valuation opportunity has now been realised, but others have barely started on the journey, the manager continued.
For example, there are still about 200 companies with these affiliate relationships still in place, he explained, leaving opportunities to capture companies that are still very early into this corporate reform story.
Where are the opportunities?
Because many Japanese companies are still early in their corporate reform journey, there are plenty of interesting long-term opportunities available in the market, according to Mitchinson.
For example, he highlighted the information technology company Kyocera, which he invested in for the first time in late 2024.
“I had never really invested in it prior because, to be frank, it just did not care about shareholders.”
However, prompted by the stockmarket’s governance reforms, the company has finally “become serious” about its cost of capital by committing to sell some of its underperforming business units and return money to shareholders.
“This isn’t a process that will finish in six months; it will probably take 10 years to unlock all that value,” the Zennor manager said.
“Although the company isn’t perfect today, we think they have a long runway for growth.”
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He also pointed to the financial sector as an area of ongoing interest.
Insurance companies in Japan had a history of price-fixing due to conflicts of interest in their large equity portfolios. In recent years, the government has taken a more interventionist approach, demanding that these large insurance companies sell down some of their cross holdings.
This story has accelerated since the banks have gotten involved, with some promising to eventually sell almost all their crossholdings, offering a significant opportunity for long-term investors, he said
“As these banks sell down, lots of businesses that they were invested in are being encouraged to do the same and are being forced to buy back the shares the banks used to own.”
This is rippling into other industries and is behind some major corporate reform stories in recent years, such as the Toyota Group, according to the Japanese manager.
Mitchinson’s Zennor Japanese Income fund has recently marked its third anniversary since its launch on 24 April 2023. Since its inception, the strategy has delivered a 73.6% return for investors, compared with the IA Japan Sector average of 49.1%.
Over a three-year time frame, it is a top-quartile performer in the peer group, according to data from FE fundinfo.
