Japan 2025: Israeli investors miss out

Japan is undergoing one of the most significant market transformations of the past generation. Once considered a “value trap” defined by inefficiency, cash hoarding, and weak governance, corporate Japan is now reorienting toward profitability, capital efficiency, and shareholder returns. Regulatory reforms, pressure from global investors, and structural changes to the Tokyo Stock Exchange drive companies to unlock value at a scale not seen in decades.

Global investors have already recognized the shift: Warren Buffett, Norway’s sovereign wealth fund, and CalSTRS have all allocated decisively to Japan. Foreign investors now own over 30% of Tokyo-listed equities. Yet Israeli institutional investors remain severely underexposed, with allocations of less than 2%. This underweight risks missing what may be one of the most important re-ratings in global equity markets.

From Bubble to “Lost Decades”

The reputation of Japanese equities was forged in the aftermath of the late 1980s asset bubble. Following the crash, Japan entered nearly three decades of sluggish growth and deflation. Several factors entrenched the perception of Japan as a stagnant market:

Opaque corporate governance: Boards dominated by insiders, limited accountability, and scarce transparency.

Cash-heavy balance sheets: Companies accumulated large cash reserves as insurance against instability, rather than reinvesting or returning capital.

Cross-shareholdings: Firms held each other’s stock, insulating management from market discipline.

Conglomerate inefficiency: Diversification into unrelated businesses diluted returns.

The consequences were clear: return on equity (ROE) languished around 8–10%, corporate valuations remained depressed, and international investors dismissed Japan as “cheap but unproductive.” For many institutions - including in Israel - this narrative became conventional wisdom, discouraging allocations.

The Reforms Reshaping Corporate Japan

That narrative is now obsolete. Over the past decade - and with increasing momentum since 2023 - Japan has embarked on far-reaching reforms that are altering corporate behavior, capital allocation, and investor returns.

Tokyo Stock Exchange (TSE) Initiatives

In March 2023, the TSE introduced an unprecedented mandate for listed companies to adopt “management conscious of cost of capital and stock price.” This policy nudged firms toward greater capital efficiency, transparency, and accountability. In 2024, a wave of share repurchases and dividend announcements followed, signaling a decisive break from cash-hoarding. The TSE also announced new requirements for the TOPIX Index, tightening eligibility and forcing almost 1,000 underperforming firms to exit by 2028. This increases pressure on listed companies to demonstrate genuine shareholder value creation.

Financial Services Agency (FSA) Pressure

The FSA has taken aim at cross-shareholdings, one of the most entrenched inefficiencies in Japanese corporate culture. The country’s three largest insurers - traditionally heavy holders of strategic stakes - have committed to divesting their cross-shareholding portfolios. This is a cultural turning point, as it strips away a key shield that protected weak management teams from external accountability.

Corporate Governance Code and Stewardship Code

Japan has progressively tightened its Corporate Governance Code and Stewardship Code, aligning board practices and investor responsibilities more closely with global standards. Independent directors are now common, disclosure requirements have expanded, and investors are increasingly required to vote with a focus on long-term value creation.

The Rise of Shareholder Activism and Private Equity

Reforms have opened the door to forces that were once marginal in Japan: shareholder activism and private equity.

Shareholder Activism

Activists are no longer outsiders. Institutional investors increasingly support campaigns for higher returns, divestments of non-core assets, and management accountability. CEO reappointment votes are no longer guaranteed: executives at companies delivering sub-5% ROE now face meaningful opposition. Activism is evolving from confrontational to collaborative, often backed by domestic investors.

Private Equity and M&A

Japanese corporates are beginning to divest non-core businesses, creating opportunities for private equity to acquire and restructure assets. Global buyout firms are scaling operations in Japan, attracted by low financing costs, a favorable regulatory environment, and a deep pool of underutilized assets. Domestic M&A activity is also accelerating, as companies consolidate to achieve scale and competitiveness.

Together, activism and private equity represent new sources of capital discipline in a market that historically lacked it.

Global Investors Are Already Positioned

Global capital has not waited for consensus. Several high-profile moves underline the conviction in Japan’s transformation. Warren Buffett invested more than $13 billion in Japan’s trading houses. Norway’s sovereign wealth fund allocates over 6% of its global equity portfolio to Japan. CalSTRS: One of the largest U.S. pension funds, with similarly significant exposure. Meanwhile, foreign investors as a whole now own 32% of Tokyo-listed equities. Their influence has been central in raising expectations for profitability, transparency, and shareholder returns.

Why Israeli Investors Lag Behind

Despite this global momentum, Israeli institutional investors remain severely underweight. With exposure at less than 2%, local portfolios are out of step with both the scale of Japan’s market (the world’s third-largest equity market) and with the allocations of global peers.

The hesitation stems from outdated assumptions: that Japanese corporates are still stagnant, that cash piles will remain untapped, and that activism will never take root. These assumptions are no longer valid. The risk is that Israeli institutions may miss one of the most significant structural re-ratings of the next decade.

Implications for 2025 and Beyond

The case for Japan today rests not on short-term market momentum but on structural change:

Improving capital efficiency: Higher ROEs and more disciplined capital allocation.

Increased payouts: Record dividends and buybacks, signaling shareholder alignment.

Governance convergence: Japan moving closer to global best practices.

Activism and private equity: Providing new catalysts for restructuring and value creation.

Geopolitical alignment: Japan’s role as a strategic partner to the U.S. adds long-term stability. For investors seeking exposure to developed markets with improving fundamentals, Japan represents a unique combination of scale, reform momentum, and opportunity.

For Israeli institutional investors, the challenge is to move past outdated perceptions. Remaining underweight risks not only missing attractive returns but also lagging global peers in one of the most important investment stories of the decade.

The question is no longer whether Japan can change. The change is already underway. The real question is whether Israeli capital will participate - or watch from the sidelines.