Japan has long presented investors with a familiar tension: many companies appear attractively valued, yet inexpensive valuations alone do not create returns. Today, the opportunity is more interesting because the environment around those companies is changing. We believe corporate governance reform, changing ownership structures and demographic pressures are encouraging businesses to think differently about capital, strategy and succession.
For long-term investors, these changes are creating opportunities across both public and private markets. Although the approaches are different, they are increasingly connected by the same underlying idea: Japanese companies are being pushed to make better use of capital and, in many cases, to reconsider how they are owned and managed.
How Are Corporate Governance Reforms Changing Japan?
Japan's governance reforms have developed over more than a decade. The Stewardship Code was introduced in 2014 to encourage institutional investors to engage constructively with companies. It was followed by the Corporate Governance Code in 2015 for listed companies. Together with other reforms, these measures helped prompt the addition of independent directors to boards and increased companies' focus on shareholder returns. The Corporate Governance Code was revised again in July, with the latest version emphasizing sustainable growth and boosting company value over the medium to long term.
Alongside these reforms, dividends and share buybacks have increased, cross-shareholdings have declined and shareholder engagement has become more prominent. This does not mean that every Japanese company will suddenly become more efficient. It does, however, create a stronger backdrop for management teams and boards to reconsider balance sheets, non-core assets and businesses that are not generating attractive returns. For active investors, this can create a broader range of potential catalysts than valuation alone.
What Is the Opportunity in Japanese Public Equities?
Public markets offer perhaps the clearest view of this transition. Japan has a large universe of listed companies, and many smaller businesses receive relatively limited analyst coverage. Our research suggests that Japanese small- and mid-cap companies trade at lower valuations than both the country's largest listed businesses and businesses in other developed markets.
That combination can create an attractive environment for fundamental investors. A good business may be overlooked because it is small or under-researched. A company with excess cash may have an opportunity to improve shareholder returns through better capital allocation. Non-core assets can be sold, governance can improve and, in some cases, strategic change can lead to a transaction.
The important point is that the opportunity is not simply to buy companies because they are inexpensive. The more compelling situations are those where a sound underlying business is paired with a credible path for value to be recognized.
Why Is Private Equity Growing in Japan?
Private equity offers a more direct way to participate in many of the same changes. Japan's aging population of business owners has created a significant succession challenge. Tokyo Shoko Research, one of Japan's largest credit research and data analytics agencies, estimated in December 2025 that 62.6% of Japanese companies have no successor to take over operations. At the same time, pressure on larger companies to focus their portfolios can create opportunities for carve-outs and take-private transactions.
In a succession situation, a private equity investor can provide an owner with liquidity while helping the business transition to a new generation of ownership. In a carve-out, a business that was not central to a larger corporate group can become the focus of a dedicated management team and ownership structure. Private ownership can also create room for longer-term operational initiatives, including management development, acquisitions, international expansion and productivity improvements.
How Are Japan’s Public and Private Equity Markets Connected?
Japan's public and private equity markets each offer distinct advantages. Public markets provide liquidity and access to a broad universe of companies. Private markets offer greater control but less liquidity, allowing investors to take a more direct role in ownership transitions and operational change.
However, the deeper investment thesis is closely connected.
Consider a public company with excess cash, underutilized assets and several unrelated businesses. Historically, those characteristics could persist for years. In today's environment, there are more reasons for the status quo to be challenged. Management can improve capital allocation, shareholders can push for change and a non-core business can be sold. The company itself can also ultimately move into private ownership.
The dividing line between public and private opportunities can therefore be surprisingly thin. Governance reform creates pressure for change, demographics create a need for new owners, and industrial change creates a need for investment. We believe valuations can provide the economic incentive for investors to step in.
Is Japan a Long-Term or Short-Term Opportunity?
What makes Japan particularly interesting today is that these forces are occurring at the same time. Corporate governance is evolving, companies are paying greater attention to capital allocation, aging founders are confronting succession, and private capital is becoming a more established part of the ownership landscape. According to leading international law firm White & Case, Japanese private equity deal activity reached US$92 billion in 2025, up from US$25 billion in 2021.
For public equity investors, these changes can create opportunities to identify companies where stronger governance, better use of capital or corporate restructuring can help unlock value. For private equity investors, they can create opportunities to participate directly through succession, carve-outs, take-privates and operational improvement.
None of this removes the risks. Japan's demographics remain challenging, currency movements can affect returns for foreign investors, and private investments introduce additional considerations around illiquidity, leverage and execution. In public markets, inexpensive businesses can remain inexpensive, while corporate reform will not affect every company in the same way.
For these reasons, we believe the opportunity is better viewed as a long-term structural theme than a short-term market call. Japan is changing the way companies are owned, governed and managed. For patient investors, the opportunity may lie not simply in buying Japan, but in identifying the businesses and investment managers best positioned to benefit from that transformation.
Disclaimer:
Unless otherwise specified, references herein to “Prime Quadrant” are intended to mean the Prime Quadrant group of companies. The firms that comprise the Prime Quadrant group of companies include Prime Quadrant Corp. and Prime Quadrant US, LLC. Prime Quadrant Corp. is registered as a Portfolio Manager and Exempt Market Dealer in Alberta, British Columbia, Manitoba, Ontario, Quebec, and Saskatchewan and as an Investment Fund Manager in Ontario and Quebec. Prime Quadrant US, LLC is an SEC-registered investment adviser. Each firm provides specific services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. Each firm enters into client engagements independently. No advice is intended to be rendered, nor is any advice provided, by a Prime Quadrant company unless a client service agreement is in place.
The information in this document (the “Information”) does not constitute an invitation, inducement, offer or solicitation in any jurisdiction to any person or entity to acquire or dispose of, or deal in, any security, and interest in any fund, or to engage in any investment activity, nor does it constitute any form of investment, tax, legal or other advice.
This document may contain statements that constitute forward‐looking statements which are based on current expectations or projections. These statements are not guaranteeing future performance and involve several risks and uncertainties which could cause actual developments and results to differ materially from what is expressed or expected. Past or targeted performance is not indicative of future results and therefore actual results may vary.
