More than a decade has passed since Japan's corporate governance reforms began in 2015, and this year saw the third revision of the Corporate Governance Code. What stands out is a shift in the focus of reform. Whereas the previous emphasis was on "correcting undervalued share prices through the remedy of inefficient governance," the focus is now shifting toward "raising valuation levels through the practice of growth-oriented governance."
A Shift in Policy
Two documents symbolize this shift. The first is the "Growth Investment Guidance" (*1) published by the Ministry of Economy, Trade and Industry (METI) on July 21, alongside the revised Corporate Governance Code. The combined ratio of capital expenditure, R&D spending, and personnel costs to sales stood at 17.7% in Japan (2023), versus 29.4% in the United States and 27.2% in Europe. Meanwhile, over the 12 years from 2013 to 2024, shareholder returns in Japan grew 3.5x (versus 1.1x in the US and 1.5x in Europe), painting a picture of that have increased shareholder returns while restraining growth investment. The guidance addresses this situation using the criterion of whether a business is generating returns above its cost of capital. It frames the issue as capital remaining tied up in businesses whose profits fall short of the cost of capital, and calls for restructuring business portfolios — including transfers to "best owners" — to address this.
The second is the "Proposal for Governance Reform to Continue Growing Corporate Value" (*2), submitted to the government on July 29 by the Liberal Democratic Party's Project Team on Growth-Oriented Corporate Governance. Sharing the same problem awareness, it calls for advancing three things together: strengthening management capability, achieving a level playing field in institutional rules, and enhancing legal enforcement. While media reports focused on a proposed review of the requirements for shareholder proposal rights and the right to demand an extraordinary general meeting, the proposal clearly acknowledges the constructive side of activism in bringing discipline to management, while distinguishing this from "abusive activism," where legal violations or circumvention of disclosure obligations are suspected, from constructive dialogue.
Changes in the Market
The market is moving in the same direction. Companies in TOPIX trading below 1x price-to-book value accounted for 38% of market-cap weight (54% by number of companies) at the end of 2022, but this had shrunk to 14% (36% by number of companies) by the end of 2025. This likely reflects the cumulative effect of a decade of reform, combined with the Tokyo Stock Exchange's March 2023 request to listed companies, "Actions to Implement Management that is Conscious of Cost of Capital and Stock Price," as well as the tailwinds of a global rally in equities and a weaker yen.
Activist performance is also at a turning point. According to data compiled by Okasan Securities, the TOPIX-relative return 240 trading days after an activist's initial disclosure of a newly acquired stake (with a market cap of at least ¥30 billion at the time of disclosure) was strong in 2023 (+5.0%) and 2024 (+9.7%), but has since weakened, coming in at +0.7% in 2025 and −0.8% in 2026 as of 60 trading days into the year. That said, the figure was +2.2% in 2021 and roughly flat in 2022, suggesting that 2023–2024 may in fact have been the exception. We believe this reflects both the resolution of broad undervaluation and a crowding of proposals, with the number of activist investments in 2025 reaching a record 174 cases (the second-highest in the world after the United States).
Implications for Investment
Where, then, does valuation correction go from here? The share of companies trading above 3x price-to-book (2021–23 average) stands at 15% in Japan, versus 31% in the United States and 26% in Europe — still a meaningful gap. However, companies in TOPIX trading above 3x price-to-book already account for 29% of market-cap weight, meaning highly rated companies already represent a substantial share of the market. What is lacking is not the level of valuation but its breadth.
If both policy and the market have entered a phase of “increasing the number of companies that can justify a premium valuation,” then our role is to engage in dialogue with companies to examine, together with them, how long they can continue generating returns above their cost of capital, and what sustains that. Restructuring business portfolios comes with real-world constraints, such as maintaining employment, tax considerations, and antitrust law. Carefully and repeatedly examining, within these constraints, where capital should be directed is, we believe, where we add the most value.
Sources:
*1 Growth Investment Guidance
https://www.meti.go.jp/press/2026/07/20260721001.html
*2 Proposal for Governance Reform to Continue Growing Corporate Value
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