The difference between Japan ten years ago and now is significant and points to an equally constructive an dynamic time ahead, says Richard Aston, portfolio manager of the CC Japan Income & Growth Trust PLC and the Chikara Japan Income & Growth Fund.
It’s been ten years since we launched our Japan strategy – and what a decade it’s been.
The time we’ve spent building and maintaining our portfolio has coincided with one of the most transformational periods ever for corporate governance in the country.
A culture of increasing shareholder returns, disciplined capital allocation, and meaningful investor engagement has emerged. Today, Japan boasts a wide universe of high-quality, income-generating companies that are continuing to flourish.
Still, while progress has no doubt been strong; there’s always room for improvement.
With a major, upcoming update to Japan’s corporate governance expected to place an even greater emphasis on putting company cash to work, we expect to see capital efficiency step up even more across the board moving forward.
Here’s to celebrating the first ten years; and looking forward confidently to the next ten from here.
Reform in Motion
First, a bit of background.
Prior to Abenomics, Japanese companies long faced criticism for their perceived prioritisation of stability and management control over the creation of shareholder value.
This all began to change, however, with the introduction of the country’s first corporate governance and stewardship codes in 2015.
Among other things, the duo reset the status quo by pushing companies to return cash to shareholders by way of dividends and share buybacks, increase their transparency and disclosure, strengthen the independence of their boards, and engage more openly with investors.
The spirit of change quickly began to build to build momentum. But it’s really caught fire in the last five years thanks to the introduction and enforcement of initiatives by the Japan Exchange Group, including but not limited to:
-Reorganising the Tokyo Stock Exchange into Prime, Standard, and Growth markets to improve clarity for investors and set higher operating standards
-Requesting companies outline specific plans to increase corporate value such as improving cost of capital, disclosures, and shareholder communities
-And perhaps most important, publicly naming those public companies that don’t adhere to its requests—highlighting them as laggards in a world of change
The message has been received loud and clear: companies that do not step up their game must either do so or reconsider whether they should be listed at all. And looking at the data, it’s clear the JPX’s hard-line approach is working.
Japanese companies are set to raise dividends to a fifth consecutive record this year in spite of tariff volatility, while share buybacks earlier this year were nearly triple those of the previous year.
Cross shareholdings, long seen as a drag on efficiency, are being unwound at an increasingly rapid pace.
And average price-to-book ratios for listed Japanese companies have risen from 1.1 in July 2022 (when the need for them to improve was first highlighted by the TSE) to 1.4 in 2025, while average return on equity has risen from 8.4% to 9% over the same period.
The difference between the corporate Japan of old and today is, in short, stark.
Companies are becoming more efficient, clearer in their reporting, and increasingly focused on shareholder interests. And for strategies like ours, the number of high-quality, income generating names with genuine potential for long-term upside has consistently grown.
The Bright Road Ahead
So, that’s the first decade; but what about the next? We believe the outlook could prove even more constructive.
Where reforms to date have focused heavily on bottom-up, company-level improvements, we expect the future to pair this “micro” focus with a “macro” one.
In particular, we see stricter rules around company’s excessive cash balances – a legacy issue from the Japan of old.
You see, with Japan shift away from an era of deflation and into one of persistent inflation above the Bank of Japan’s 2% target, “hoarding” cash is likely to become a bigger problem for shareholders.
For one thing, it’s no longer “free” – it’s losing value in real terms, and that’s hardly in the spirit of maximising value for shareholders.
Perhaps more pressingly, though, Japan’s newest Prime Minister Sanae Takaichi has already signalled clearly that she intends to push companies towards injecting their cash back into the economy – either by way of increasing wages or making capital investments. The cash under the mattress, in her view, is a very significant source of domestic investment that can reduce the government’s own spending burden.
The likelihood is next year’s revision to Japan’s corporate governance code will reflect this.
Analysts at Nomura and Nikko are anticipating an emphasis on the need for companies to recognise diverse investment opportunities and continually reassess whether their allocation of cash and deposits is appropriate.
Should this be the case, we would welcome it.
As well as enhancing transparency, a more assertive stance on capital allocation would support stronger long-term earnings growth as companies reinvest more productively. And this, along with the potential for more excess cash to find its way to shareholders by way of dividends and buybacks, could unlock another phase of valuation improvement.
Opportunities of Long-Term Upside
The past ten years have been transformational for corporate governance in Japan, rewarding not just our strategy but any investor willing to recognise early signs of change.
The next ten stand to be even more dynamic.
As the reach of reform becomes increasing expansive, turning the spotlight on capital efficiency and long-term growth, we’re confident the CC Japan Income and Growth Trust is positioned to capture all the opportunities that may emerge.
Main image: louie-martinez-IocJwyqRv3M-unsplash
