The Activist Awakening in Japan: Why Underperforming Equities Offer a New Era of Value

In the quiet corners of Tokyo's financial district, a seismic shift is underway. Shareholder activism, once a niche strategy in Japan, has erupted into a full-blown revolution. Over the past three years, the number of activist campaigns targeting Japanese firms has tripled, with manufacturing and retail sectors at the forefront of a structural transformation. For investors, this is not just a moment—it's a generational opportunity to capitalize on undervalued equities as governance reforms, dividend demands, and operational overhauls reshape corporate Japan.

The Activism Surge: Data-Driven Momentum

The numbers are staggering. In 2024, Japanese companies faced 108 activist campaigns, a 74% increase from 2018. By June 2025, shareholder proposals hit a record 113, with institutional investors driving 51% of these demands. The focus? Governance overhauls, dividend hikes, and capital returns. For example, manufacturing giant Hitachi sold 22 subsidiaries—a radical downsizing to focus on high-margin semiconductor and infrastructure businesses—after activists pushed for a leaner structure. Its stock price rose 18.6% annually in EUR terms over five years, a stark contrast to its stagnant pre-activism valuation.

Manufacturing: From Over-Diversification to Precision

Japan's manufacturing sector has long been a victim of its own success. Companies like JSR, once bogged down by low-margin synthetic rubber divisions, now pivot toward high-growth semiconductor materials after activists forced a strategic carve-out. Similarly, SK Kaken (chemicals) and Daidoh Limited (automotive parts) have boosted dividends and buybacks, targeting ROE improvements. The Tokyo Stock Exchange's “name and shame” policy—which highlights firms with subpar price-to-book ratios—has amplified this pressure.

The Bank of Japan's 2024 rate hikes further incentivized change, as firms with excess cash reserves became prime targets. Private equity firms like KKR capitalized on this, launching a $3.8 billion bid to take IT firm Fuji Soft private—a deal catalyzed by earlier activism from 3D Investment Partners.

Backtest the performance of MSCI Japan Index constituents when 'buy condition' is triggered on Bank of Japan rate decision dates with a hike, and hold for 60 trading days, from 2015 to 2024.

Historically, this strategy has proven rewarding. Between 2015 and 2024, buying MSCI Japan Index constituents on Bank of Japan rate hike announcements and holding for 60 trading days delivered a 26.82% compound annual growth rate (CAGR), with an excess return of 154.85%. While the strategy experienced a maximum drawdown of -27.15%, its Sharpe ratio of 0.82 suggests favorable risk-adjusted returns. These results align with the thesis that BOJ rate hikes—signaling economic confidence—create buying opportunities for undervalued Japanese equities.

Retail: Adapting to a New Consumer Landscape

Retail, a sector historically resistant to change, faces existential threats from rising wage costs and inflation. Here, activists are demanding operational efficiency and capital discipline. Fast Retailing (Uniqlo's parent) exemplifies success: its embrace of AI-driven inventory management and store optimization boosted margins. Meanwhile, laggards like Bunka Shutter (construction materials) face shareholder proposals to sell non-core assets or overhaul leadership.

The Nippon Individual Savings Account (NISA) program has amplified this trend, as small investors increasingly vote with their wallets. By 2024, ¥5 trillion flowed into equities via NISA, with retail stocks a key beneficiary.

The Governance Catalyst: Code Compliance and Accountability

Japan's Corporate Governance Code, updated in 2021, mandates that Prime Market firms have at least one-third independent directors. By 2024, 98.1% complied—a sea change from 2018's 60%. The Tokyo Stock Exchange now requires Prime Market firms to disclose in English, broadening investor scrutiny.

Activist funds like Strategic Capital and UGS Asset Management have weaponized these rules. In Toyo Securities, activists secured a 57.3% vote for a special dividend after exposing poor capital allocation. The result? A board shakeup and a 20% stock price jump.

The Risks and the Reward

Critics cite structural barriers: supermajority voting requirements and a preference for consensus over conflict. Yet even here, activists are adapting. In Toyo Securities, a coalition of institutional investors bypassed these hurdles by leveraging proxy votes.

The bigger risk? Missing the wave. With 417 carve-out transactions in 2024 alone, Japan's manufacturing and retail sectors are becoming engines of shareholder value. The SSBJ Sustainability Standards, effective March 2025, will further push firms to align ESG goals with governance reforms.

Investment Strategy: Overweight the Underdogs

For investors, the playbook is clear: overweight Japanese equities in manufacturing and retail, particularly firms with:
1. Low price-to-book ratios (e.g., <1.5x), signaling undervaluation.
2. Subpar ROE (<10%), offering upside from activist-driven efficiency.
3. High cash reserves (relative to market cap), enabling buybacks.

Consider ETFs like iShares MSCI Japan Small-Cap ETF (EWJF) or sector-specific funds targeting industrials and consumer discretionary. For alpha seekers, Hitachi, JSR, and Fast Retailing exemplify activist-fueled turnarounds.

Conclusion: The New Japan

Japan's activist awakening is not a flash in the pan. With governance reforms enshrined, investor activism institutionalized, and capital markets globalized, the era of sleepy corporate behemoths is ending. For investors, this is the moment to lean into Japan's undervalued sectors—where activism isn't just shaking up companies, but rebuilding them for the next decade.

The question isn't whether to act—it's how quickly you can capitalize.

Andrew Ross Sorkin's signature style blends incisive data analysis with actionable insights, positioning him as a trusted voice for institutional and retail investors alike.