Japanese Activism
Last week we wrote about the great catch-up trade. Despite the Strait of Hormuz still looking like an unsolvable mess, the resulting inflation fears seem to have peaked. Even though we are only 1 sinking VLCC or 1 angry Houthi away from oil going into the triple-digits, we are thinking about what the markets look like in a more normalized environment. And we conclude that, similar to markets in 2021, investors will look abroad to find companies whose share price does not yet reflect this new reality.
Other than emerging markets recovering in a low-inflation environment with no further rate hikes, Japan’s stock market has a lot of catching up to do in such a world. The Nikkei might not show this underperformance, but any Japanese company that does not directly benefit from ETF flows is trading close to its 52-week low.
Japanese small caps have been left for dead.
Admittedly, Japanese companies have been cheap since their fall from grace in 1990. Everybody knows that. Every PM has at least 1 junior analyst who is intent on striking it rich by buying a portfolio of Japanese net-nets.
And all those analysts are learning the hard way that what’s cheap now can be cheap forever if it’s run by a management team who doesn’t dream about creating shareholder value every night.
But there has always been a group of real BSDs, both in Japan and in the West, who are looking at those companies and who are seeing opportunity. After all, even in a slow-growth economy with terrible demographics, it should be possible to make money on stocks if the starting point is 3x P/E, as long as you convince management to care about the share price.
Which gets us to the theme of this week: the rise in Japanese activism.
Source: IR Japan Holdings
Japan’s first activist wave arrived around 2000, after the collapse of the bubble economy slowly dismantled Japan’s web of cross-shareholdings. For decades, shareholders had largely existed to applaud management and enjoy the lunch buffet at the annual meeting. Then came the Murakami Fund and foreign activists like Steel Partners, who looked at balance sheets stuffed with cash, sprawling conglomerates and single-digit returns on equity and started asking uncomfortable questions.
The first wave ultimately fizzled after Murakami’s insider-trading conviction and the Global Financial Crisis, but the underlying opportunity never disappeared. Corporate Japan remained one of the world’s largest collections of companies trading well below their potential.
Dan Loeb’s activist campaign against Seven & i Holdings began in 2015. He failed to force a breakup of the sprawling conglomerate, whose lower-quality department stores and supermarkets obscured the value of its world-class convenience store franchise. But the campaign helped modernize corporate governance, laying the groundwork for ValueAct’s activism in 2021 and, eventually, Alimentation Couche-Tard’s takeover proposal in 2024.
The real turning point came under Shinzo Abe. Abenomics wasn’t just about monetary stimulus. It also recognized that Japanese companies had spent decades optimizing for stability instead of shareholder returns.
The Stewardship Code (2014) encouraged institutional investors to actually behave like owners, while the Corporate Governance Code (2015) nudged companies toward independent directors, improved capital allocation and greater accountability. Later revisions increased voting transparency, making it harder for domestic institutions to support management automatically.
Then the Tokyo Stock Exchange decided subtle hints weren’t enough. Following its 2022 restructuring, the TSE publicly asked companies trading below book value to explain how they intended to improve capital efficiency. Translation: you’ve been sitting on cash for thirty years, your ROE resembles a savings account, and perhaps owning half your suppliers isn’t a strategy anymore. Companies suddenly found themselves under pressure to launch buybacks, unwind cross-shareholdings, sell non-core assets and articulate an actual investment case.
We like to joke that the US outperforms global stock markets because it’s the only country that awards its management team with excessive amounts of stock options, often with a vesting criteria dependent on Total Shareholder Returns on top. US management makes money if stock prices go up. It works, so why not create the same situation in Japan?
In 2025, there were 27 activist proposals related to executive compensation. They didn’t complain about excessive compensation. Instead, the proposals often called for granting RSUs to management or aligning compensation better with performance. Imagine writing a letter to a company’s BoD proposing to pay management more, not less…
Source: Japan Research Institute
That being said, the majority of proposals still followed the age-old playbook of demanding capital returns, disposing of non-core assets, and obtaining board representation.
In short, there is a host of Japanese companies that have been cheap forever, and either through public shaming or activist pressure, they are suddenly forced to care about their shareholders. While this has been ongoing for several years, things in Japan tend to move slowly, and there is still a near-infinite pool of opportunities where activists can buy, fix, and flip for a handsome profit.
We believe that, when investing, it’s important to understand your limitations. Finding the right Japanese small cap with improving corporate governance is simply too far out of our expertise. Calling ourselves tourists might be giving ourselves too much credit. When it comes to finding Japanese small cap winners, we are. Still, a group of clueless gaijin waiting to buy into a company where every local knows it’s a value trap, no matter how much governance reform is happening in the country.
The case for Hikari Tsushin and Integral KK
So rather than work our way through every Japanese small cap, why not play this theme by owning publicly traded companies that resemble activist funds? The two that come to mind are Hikari Tsushin (9435 JP) and Integral KK (5584 JP), but there might be more (let us know which ones you like in our Discord!).
Hikari Tsushin is managed by a CEO who doesn’t hide the fact that he’s a big fan of Berkshire Hathaway. The business consists of an operating business: a ‘retail’ utility company that owns customer relations to which it sells water and energy, as well as cable subscriptions. Having seen this model extensively in Europe, we are not a fan. Customer relationships tend not to be sticky, and switching costs are low.
But the interesting part is Hikari’s extensive investment portfolio of Japanese small caps. They are like Buffett in his cigar butt days. Hikari owns stakes in a very diversified book of Japanese small caps, and they are continuously adding to this portfolio.
We have reached a point where Hikari’s involvement immediately provides a vote of confidence and can cause a rerating. In public interviews, CEO Hideaki Wada has also pointed to the number of companies willing to pay them greenmail to get rid of them.
Over the last 15 years, Hikari CAGR’d their book value per share at 17%. Hikari shareholders have massively outperformed Topix, and we see no reason why this would slow down any time soon.
Where Hikari Tsushin is trying to emulate the Berkshire playbook, Integral follows the KKR / Blackstone model. They are a private equity shop. They manage a PE fund for a 2/20% and grow shareholder value by either growing their AuM or co-investing in slam-dunk deals.
While it’s hard to find the exact IRRs of most of their investments, it isn’t hard to see that they’ve owned some major multibaggers: Direct Marketing MiX was a home run, and Tekscend Photomask and Toyo Engineering are some more recent success stories.
This has led Integral to more than doubling their AuM in 2025. They will confidently tell investors that raising capital is no longer a hurdle. The only hurdle they face is finding deals fast enough to invest the capital, without sacrificing their long-term track record.
Most PE companies trade at the sum of their own book value, plus accrued but unearned carried interest, plus a multiple on their management fee and carried interest. After the recent selloff in Japanese small caps, Integral trades at barely more than its book value plus unearned carry.
We are adding Japanese activism as a new theme to our inflection monitor, with Hikari Tsushin and Integral KK as the gaijin way to play the theme.
We also added a Japanese Activism monitor as a spinoff of our 13D monitor. Go check it out!