There is a concept in institutional economics that I think about often. Douglass North called it “path dependence” — the idea that the choices available to a society at any given moment are constrained by the choices it made decades earlier, even when the original reasons for those choices have long since disappeared.
No country on Earth illustrates this more precisely than Japan.
For thirty-five years, Japanese corporations have behaved in a way that is economically irrational by any Western standard. They have accumulated enormous reserves of cash — over $1 trillion sitting on the balance sheets of nonfinancial listed companies, according to McKinsey’s 2025 analysis — giving Japan the highest ratio of corporate cash to market capitalization of any developed economy. They have held shares in each other’s companies — a practice known as cross-shareholding — not as investments but as defensive pacts, tying up capital in arrangements that generate no economic return and exist solely to prevent hostile takeovers. And they have tolerated returns on equity that have trailed their American and European counterparts for more than three decades.
They did all of this for a reason. The reason was 1989.
The Trauma That Became a Balance Sheet
The collapse of the Japanese asset bubble — the Nikkei falling from 38,957 in December 1989 to below 8,000 by 2003 — was not merely a financial event. It was a civilizational trauma. Companies that had borrowed aggressively watched their collateral evaporate. Banks that had lent against real estate values found themselves technically insolvent. The cultural response was not reform. It was fortification.
Japanese management teams, scarred by the experience of near-bankruptcy, began building balance sheets designed to survive the next catastrophe rather than to generate returns in the interim. Cash reserves expanded. Cross-shareholdings solidified. Dividends remained modest. Buybacks were nearly nonexistent. Return on equity became an afterthought.
This was not, as many Western analysts assumed for years, a sign of incompetence. It was a coherent strategic response to a specific historical experience. The problem is that strategies designed for survival tend to persist long after the threat has passed. Japan’s corporate sector entered a state of financial hibernation — and it stayed there for a generation.
By the early 2020s, more than half of all companies listed on the Tokyo Stock Exchange’s Prime Market were trading below their book value. Not a handful of distressed names. More than half.
One trillion dollars in cash. Trillions more locked in cross-shareholdings. An entire corporate sector priced as if the market believed management would never return a single yen of it to shareholders.
And then, in March 2023, the Tokyo Stock Exchange did something extraordinary.
The Letter
On March 31, 2023, the TSE issued a formal request to all companies listed on its Prime and Standard Markets. The language was polite — this is Japan — but the substance was unprecedented. The exchange asked every company trading below a price-to-book ratio of 1.0 to publish a concrete plan explaining how it intended to improve its capital efficiency and raise its valuation above book value.
Not a suggestion. A request, published on the exchange’s website, with a list — updated monthly — of which companies had complied and which had not.
The mechanism was elegant. The TSE did not impose penalties. It did not threaten delisting. What it did was more powerful: it created transparency. Securities firms and institutional investors quickly began reverse-engineering the list to identify which companies had not responded — and those companies found themselves facing a new form of pressure, not from regulators, but from their own peers and shareholders. If your competitors had published reform plans and you had not, the market drew conclusions.
By March 2025, the disclosure rate among Prime Market companies had exceeded 90%. The dominant commitments were consistent: increase dividends, launch buyback programs, unwind cross-shareholdings, divest non-core assets, and set explicit return-on-equity targets. The TSE had effectively created a public commitment device — and once that commitment was on paper, walking it back became nearly impossible.
The Era of Disappearing Shares
What happened next was not a marginal adjustment. It was the beginning of what Nomura has called “the era of disappearing shares.”
In 2024, over 1,000 Japanese companies announced buyback programs totaling ¥16.81 trillion — roughly $108 billion, a 75% increase from the prior year’s record. Combined with dividends, total shareholder returns reached ¥32 trillion. The pace in 2025 has been faster still.
These buybacks serve a structural purpose unique to this moment in Japanese capitalism: absorbing the shares being released as companies unwind their cross-shareholdings. When Toyota announced a ¥1.2 trillion repurchase plan — the largest in Japanese corporate history — the stated purpose was to absorb shares freed by the dismantling of decades-old corporate alliances. When Denso announced ¥450 billion in buybacks, it was explicitly absorbing cross-held stock that partners had decided to sell.
Shares are being bought back faster than they are being released. Float is contracting. And in 2024, the TSE recorded 94 delistings — the first time in history that the total number of listed companies actually decreased. The exchange is not only reforming its market. It is actively pruning it.
Hitachi, or How a Conglomerate Learns to Say No
There is one story that, more than any statistic, captures what is actually happening inside Japanese corporations.
In 2008, Hitachi — one of Japan’s most iconic industrial names — reported a loss of ¥787 billion, roughly $8 billion at the time. The company had 22 listed subsidiaries. It was a conglomerate that had expanded into everything and committed to nothing.
Over the following fifteen years, Hitachi sold every single one of those subsidiaries — to private equity firms, to industrial buyers, to anyone who would take operating responsibility. What remained was a focused business built around green energy, rail infrastructure, and digital systems. The stock price has appreciated at 18.6% per year in euro terms over the past five years.
Hitachi’s transformation is becoming a template. Japanese companies contain extraordinary operating assets — world-class technology, irreplaceable manufacturing capabilities, deep infrastructure expertise — wrapped in corporate structures that dilute returns. Strip away the conglomerate discount, and the underlying value surfaces. Private equity deal values in Japan nearly tripled their annual average in 2024. The TSE reform is accelerating this process by forcing management teams to confront, in public, why their companies trade for less than the liquidation value of their assets.
The Activists Are Inside the Gates
In 2025, activist investors launched a record 56 campaigns against Japanese companies — the highest in the country’s history, according to Barclays data. Japan now accounts for approximately half of all global activist campaigns outside the United States.
This is not a Western imposition on a reluctant culture. It is a convergence. The Murakami Funds — a domestic Japanese activist — ran eight campaigns in 2025, making it the third-busiest activist investor in the world behind only Elliott and Starboard Value. Non-local hedge funds accounted for 43% of campaigns. But the majority — 57% — were driven by domestic or Asia-based investors.
The narrative that activism is something done to Japan rather than by Japan no longer holds. The campaigns are getting bolder: operational and strategic demands now represent 30% of all objectives, and a record number of CEO departures followed within a year of an activist campaign.
Meanwhile, Warren Buffett raised his stakes in Japan’s five largest trading houses to nearly 10% each — investing $13.8 billion total — and told shareholders he intends to hold “for 50 years or forever.” He entered when the cash hoards and sub-book valuations were treated as permanent features of Japanese capitalism. Everything since has moved in the direction his investment anticipated. The market has started to agree with him. It has not yet finished agreeing with him.
What the Market Has Not Priced
And yet.
The TOPIX still trades at a significant discount to the S&P 500 on both price-to-earnings and price-to-book metrics. Forty-four percent of Prime Market companies still trade below their book value. Return on equity, while improving, remains below the 13 to 15% range that would justify a full re-rating.
The question I keep returning to is whether this is the early phase of a multi-year re-rating — analogous to what happened in the United States in the 1980s, when leveraged buyouts, hostile takeovers, and shareholder activism forced a generation of bloated conglomerates to disgorge cash, divest non-core assets, and refocus on returns. That process took a decade.
It repriced the entire American equity market. And it began with exactly the same ingredients present in Japan today: undervalued assets, excess cash, activist pressure, and a regulatory environment that shifted from protecting management to empowering shareholders.
I believe it is the former. And I believe the re-rating is still closer to its beginning than its end.
There is a category of Japanese companies — mid-caps, mostly invisible to foreign investors — that sit at the intersection of three simultaneous forces: they trade below book value, they have an activist investor on their register who has publicly demanded capital return, and they have already filed their reform plan with the TSE.
These companies have committed, in writing, to closing their own valuation gap. They have an external agent — the activist — providing pressure and accountability. And they are priced as if none of this will work.
I have spent the past month building a screen for these companies. The list is shorter than you might expect — approximately thirty names that meet all three criteria simultaneously. Of those, I have narrowed to three where the combination of cash on balance sheet, activist credibility, and management commitment creates what I believe is the most asymmetric setup in developed-market equities right now.
One of them is a mid-cap industrial that holds net cash equal to 45% of its market capitalization.
An activist entered the register in 2024. Management published its reform plan with the TSE three months later — committing to a payout ratio that, if honored, implies a dividend yield north of 6% at the current price. The stock trades at 0.6 times book value. It has no analyst coverage in English.
The full screen methodology, the three names, the entry zones, and the currency hedging framework are in the premium section below.