Many see Japan as a value play. The real opportunity is its high number of quality companies (250+ with >40% gross margins) that were historically mismanaged. Ongoing governance reforms are now unlocking the potential of these high-margin franchises.

For 30 years, Japanese firms retained profits instead of returning capital, accumulating huge cash and asset piles on their balance sheets. Now, the Tokyo Stock Exchange is pushing for buybacks and dividends, creating a powerful catalyst for value realization that is independent of new earnings generation.

Analysis in Japan reveals a direct positive correlation between improved corporate governance metrics, such as board independence, and equity returns. This suggests that governance reforms across Asia are not just about compliance but are a tangible source of investment alpha for discerning investors.

For years, Japan was a value trap: cheap companies with poor governance hoarded cash. The game changed when Prime Minister Shinzo Abe introduced stewardship and governance codes, creating a top-down, government-backed catalyst for companies to finally improve capital allocation and unlock shareholder value.

With passive investing dominating and market-wide flows unreliable, investors can no longer wait for multiple expansion. The best small-cap investments are companies actively closing their own valuation gaps through significant buybacks, strategic M&A, or other aggressive, shareholder-aligned capital allocation.

Once dismissed for poor shareholder returns, Japan has implemented structural reforms forcing companies to improve ROE and capital allocation. This pressure to create shareholder value, combined with historically low valuations, has turned the market into a "hidden treasure" for savvy investors.

When investing in markets with potential governance hurdles, like regional Japan, the "deep value" principle is key. Purchasing assets at a fraction of book value creates a margin of safety. Even if activism takes longer or yields less, the low entry price can still generate an acceptable return while risking no capital.

The Tokyo Stock Exchange has issued an ultimatum to companies: get your price above book value or be delisted. This is forcing an end to centuries-old practices of corporate cross-ownership and compelling companies to engage in buybacks and other shareholder-friendly actions, providing a powerful catalyst for the market.

The current M&A landscape is defined by a valuation disparity where smaller companies trade at a discount to larger ones. This creates a clear strategic incentive for large corporations to drive growth by acquiring smaller, more affordable competitors.