Each April, Japan is adorned with the delicate blush of Sakura blooms — beautiful but fleeting, a symbol of life’s impermanence. That contradiction sits at the heart of Japan’s ongoing corporate reform story. After years of transformation, can this quiet revolution survive the chill winds of a shifting global trade environment?
Policy upheaval
The US administration continues to drive a dramatic overhaul in global geopolitics and trade. With China bearing the brunt of Washington’s stance and Europe responding by ramping up defence spending, Japan finds itself navigating a new and uncertain economic landscape.
Like all economies reliant on trade with the US, Japan is adjusting to a new reality. A blanket 10% tariff has been imposed on most exports, with automobiles facing an even steeper 25% rate. These terms remain subject to negotiation, but the message is clear: Japan is not exempt from the new rules of engagement.
Japan has long grappled with deflation and the economic stagnation that accompanies it
Despite this, Japan has been identified as one of the first countries likely to secure a revised trade deal. However, with economic growth forecasts now being revised down due to the impact of tariffs, questions arise over whether slower growth will affect corporate behaviour and potentially reverse some of the progress made.
A quiet revolution
It has been 13 years since former prime minister Shinzo Abe launched his “three arrows” economic strategy, aimed at revitalising corporate Japan. Though Abe was tragically assassinated in 2022, his vision continues to take root. Corporate governance has shifted towards a more Western, shareholder-friendly model. Companies are addressing inefficient balance sheets and returning excess cash through increased dividends and buybacks.
Japan has long grappled with deflation and the economic stagnation that accompanies it. The Bank of Japan, after years of effort, is finally seeing a low but stable rate of inflation take hold.
This progress was underscored by the recent Shunto wage negotiations — the country’s key annual labour talks — which delivered a second consecutive year of wage increases above 5%. These inflation-beating settlements point to a resilient labour market and growing consumer confidence.
Compared to global equity markets trading near cyclical highs, Japan offers clear potential for upside if capital allocation continues to improve
But reforms are only truly tested during times of market volatility. Despite the turbulence seen in April, Japanese companies have stayed the course, announcing some $27bn in share buybacks during the month — nearly triple the amount from the previous year. That level of capital discipline reflects real commitment to long-term shareholder value.
Still, further gains are possible. Nearly half of the Topix index continues to trade below book value — essentially, at a discount to the value of its assets. Compared to global equity markets trading near cyclical highs, Japan offers clear potential for upside if capital allocation continues to improve.
Capturing the inflection
While global capital flows tend to concentrate on Japan’s largest and most liquid stocks, we see compelling opportunities elsewhere. Our Japanese equity exposure is centred on those areas where corporate reform is most pronounced.
Amid a turbulent global backdrop, Japan’s corporate reform journey is still progressing
The Zennor Japan Equity Income Fund, managed by experienced duo James Salter and David Mitchinson, exemplifies this approach. They actively engage with management teams to unlock shareholder value, often focusing on under-researched small- and mid-cap companies.
We also maintain a long-term position in Morant Wright Nippon Yield, whose deep understanding of Japanese corporate dynamics continues to deliver value in a changing environment.
Amid a turbulent global backdrop, Japan’s corporate reform journey is still progressing. Active management remains crucial — not just to navigate risks, but to capture the full potential of a market still in transformation.
Adam Norris is investment manager at Columbia Threadneedle Investments
