Reforming Corporate Japan - The Next Chapter

Tough Love Revisited: Value Trap or Value Opportunity?

In our Tough Love paper, published in November 2020, we argued that Japan’s many high-quality, cash-rich companies trading below their liquidation worth were not permanent value traps but trapped value.¹ We further posited that a decade of governance reforms combined with a slowly awakening market for corporate control would begin to close this value gap. (see Appendix 1 in the PDF version of our paper for a timeline of Japan's key corporate governance reforms since 2014.)

2020: Japan the Outlier 

As research for our 2020 paper, we ran a screen of stocks trading on global developed markets. These screens were designed to identify companies that met the liquidation criteria of the legendary value investor Benjamin Graham.² Our screen found many more Japanese companies trading below their liquidation value compared with companies in other developed markets.

Why was Japan such an outlier at the start of the decade? We argued it was because investors lacked the mechanism to unlock the value hiding in plain sight on the balance sheets of corporate Japan. Although enterprising investors could theoretically take over these companies and realize their value, the country’s weak market for corporate control had historically prevented them from doing so.

To understand why the market for corporate control was underdeveloped, we need to consider the corporate governance landscape of post-war Japan. It was one defined by stable shareholders and insider-dominated board structures. This undynamic combination protected underperforming management teams from the external discipline instilled by a well-functioning market for corporate control.

The presence of strategic shareholders (also referred to as cross-shareholders), who held other companies' shares for business relationship purposes rather than purely for investment returns, was the hallmark of this cozy corporate club. Such investors hindered the market for corporate control as they owned a sizable portion of the Japanese stock market and reflexively backed management teams. Hostile takeover bids were rarely launched. And when they were, they almost never succeeded. In short, the machinery for disciplining underperforming management simply did not function. As a result, Japanese equity valuations languished, with the TOPIX Index trading at just 1.4x tangible book value in 2020, a fraction of the market valuation multiples for the US and Europe.³

Change was coming, however. Corporate governance reforms implemented prior to 2020 had already begun to shift management behavior and empower engagement and activist investors. In time, investor engagement would become a powerful tool in helping to unlock trapped value. 

2026: Record M&A Activity and Unsolicited Bids

Over half a decade on, evidence of this change is widespread, not least in Japan’s M&A market, which has reached unprecedented levels of activity and value. Driven by corporate restructuring and the pressure for capital efficiency created by governance reforms, deals totaled an all-time high of approximately $386 billion in 2025, a 33% increase from the previous year.⁴

The Ministry of Economy, Trade and Industry’s (METI) introduction of takeover guidelines in 2023 has been an important policy driver of this changed corporate control market. Adopting a culturally friendly tone, METI reframed hostile bids as socially acceptable ”unsolicited” bids. While not legally binding, the guidelines substantially increased the pressure on boards to fulfill their duty to consider fully all credible bids. Corporate buyers now launch contested and unsolicited takeover bids that increasingly succeed.

Symbols of progress in the market for corporate control have included Nidec’s purchase of Takisawa Machine Tool Company after an unsolicited 2023 bid. The acquisition by the Kyoto-based electric motor maker, widely seen as a member of Japan’s corporate elite, marked the first successful bid by an acquirer holding no prior stake. Another milestone was Dai-ichi Life’s successful competing offer for HR services leader Benefit One in 2024—its rival bid eclipsed M3’s prior offer. This move established that a blue-chip Japanese incumbent could outbid an agreed deal.

Not Fully Open Yet

Progress in the market for corporate control has not been entirely straightforward, however, particularly in relation to recent foreign bid activity.

In 2025, Alimentation Couche-Tard’s (ACT) unsuccessful approach for Seven & i, owner of the 7-Eleven store chain, marked a notable bump in the road to a fully open market for corporate control, given it would have been Japan’s largest-ever foreign buyout. This tense, high-profile takeover saga ended after the Canadian retailer eventually withdrew its offer, citing Seven & i’s failure to engage constructively with its bid—Seven & i rejected this criticism, and our understanding is that it considered the proposal on multiple occasions.

Seven & i has since adopted a strategy of divesting its supermarket and department-store businesses and focusing on its convenience-store operations. However, the company still appears to have some way to go in delivering a meaningful improvement in corporate value, with the share price currently sitting materially below ACT’s offer price. 

This year has brought another high-profile indicator that the market for corporate control is not yet fully open. In June, the Japanese government effectively blocked the acquisition of machine-tool maker Makino Milling Machine by South Korean private equity firm MBK Partners on national security grounds, due to the Japanese defense industry’s heavy use of Makino’s machine tools.

While disappointing for shareholders, at least in Seven & i’s case, it is worth putting these recent isolated setbacks in perspective. After all, the market for corporate control did not develop in a linear fashion in the US or Europe either.

When set in a historical international context, we believe these frictions look less like backsliding and more like a normal evolution. In our view, the likely final shape of Japan’s corporate control market will not be the maximally open, highest-bidder-wins ideal.  Instead, we believe it is likely to be a hybrid settlement: open enough to discipline management yet tempered by board discretion and strategic-sector protection. In that sense, it will likely be closer to the European model than to the pure Anglo-American one.

METI’s own July 2026 restatement of its 2023 M&A guidelines reinforces this reading. Rather than revising the guidelines, METI reaffirmed that Japanese boards are not bound by a US-style Revlon duty to maximize short-term price on a sale, and that a higher offer price does not necessarily constitute a more desirable acquisition.⁵

A Surge in Shareholder Activism and Private Equity Activity

The revolution in the market for corporate control has had clear consequences. Japan has evolved into the world’s second-most active market for activist shareholders after the US, marked by a substantial increase in public campaigns and shareholder proposals. By 31 July 2026, Japanese companies had received 190 shareholder proposals at this year’s annual general meetings (AGMs), up sharply from 61 in 2020.⁶ Lazard’s own “H1 2026 Review of Shareholder Activism” corroborates the surge in activism from a different angle: Japan recorded a new high of 52 activist campaigns in H1 2026 alone, up 53% year on year, and was the main driver of a record number of activist campaigns in the Asia Pacific region.⁷

While few motions passed at these AGMs, there was a notable increase in proposals concerning director appointments/removals, majority independent boards, governance reforms, and measures to boost capital efficiency and shareholder returns. We believe this trend will continue and will motivate boards to take measures to enhance corporate value.

Based in part on recognition of these governance and control changes, private market deal flow has also increased as Japanese companies exit non-core businesses.  Global private equity firms now regard Japan as one of the most attractive markets outside the US. This is reflected in deal flow. Private equity deal value in Japan reached ¥4.⁸ trillion in 2025, the fifth consecutive year that annual deal value passed ¥3 trillion.

Changed Corporate Behavior and Increased Shareholder Returns This newly invigorated market for corporate control, combined with a raft of other corporate governance reforms implemented over the past decade-plus, has had other noteworthy effects:

A steady decline in strategic shareholdings: The value of Japanese companies’ domestic equity holdings as a percentage of their market cap has dropped from 13.3% in December 2022—a few months before the Tokyo Stock Exchange (TSE) introduced reforms requiring companies trading below their book value to disclose specific plans to improve capital efficiency—to 9.6% as of 30 June 2026.⁹

This unwind has accelerated lately, particularly in the case of the megabanks and insurers, which typically had the highest levels of strategic shareholdings. Regulation has partly driven disposals in these sectors. The Financial Services Agency (FSA) introduced rules in 2024 preventing insurance companies from holding shares for commercial relationship purposes. As a result, both life and non-life insurers have sold their strategic shareholdings. In response, other financial institutions, including banks, have reduced such cross-shareholdings. The need to comply with Basel III risk-weighting rules has served as another reason for banks to divest.

Reduced strategic shareholdings have been reflected in voting patterns at this year’s AGMs. With fewer compliant shareholders, the number of votes cast against the re-election of representative directors has risen.

Increased shareholder distributions: The TSE’s aggressive governance reforms and pressure from the government to improve capital efficiency and shareholder returns have led to a surge in shareholder distributions since the start of the decade. Share buybacks and dividends have reached successive record highs, hitting ¥41 trillion in FY 2025, up from ¥18 trillion in FY 2020  (Exhibit 1).¹⁰

A Market Re-Rating but Still Lagging Internationally 

The positive developments outlined above have contributed to a significant re-rating of the Japanese market in recent years:

• The price-to-book ratio of the broad TOPIX Index has climbed from around 1.0 at the start of the decade to 1.8 (Exhibit 2). 
• The share of TOPIX 500 companies trading with a price-to-book ratio below 1.0 has fallen from 44% at the end of December 2022—a few months before the TSE’s capital efficiency reforms—to 36%.¹¹

Admittedly, this progress must be placed in a global context: only 2% of companies in the S&P 500 Index and 10% of companies in the MSCI Europe Index currently trade below their book value.¹²

Despite this story of genuine progress, Japan’s trapped corporate value has not been fully realized; instead, it has moved. It has shifted from the balance sheet restructuring outlined in our Tough Love paper to a comprehensive focus on sustainable growth through management of the business portfolio.

For decades, many Japanese corporations were held back by conglomerate structures that often undermined their returns on equity and market valuations (see “Curse of the Conglomerates?” below). This structural weakness was publicly addressed in 2020 with METI’s publication of a document widely referred to as its “Business Portfolio Guidelines”.  This influential paper (only available in Japanese) was designed to challenge the cultural taboo among Japanese business leaders about exiting non-core businesses. Its most salient sections encouraged companies to classify their business portfolios using a growth versus return-on-invested-capital matrix and asked them to consider who was the ‘best owner’ of a business unit to maximize its potential.

METI’s paper was widely influential. Several companies diligently classified their business portfolios in the suggested format. It also provided a framework for investors to deepen engagement discussions with company management teams. However, METI’s proposals were largely defensive in nature. Many companies complied in form but not in substance, as reflected in boilerplate capital-efficiency disclosures and share buybacks announced in lieu of a growth strategy.

Conglomerates have long been a feature of Japan’s corporate landscape. Indeed, the sprawling nature of many listed businesses has widely been identified as one of the reasons for the country’s historically poor record on capital efficiency.

The trend for conglomerates was driven in part by the government-directed, banking-led postwar reconstruction of the Japanese economy. This emphasized corporate diversification to reduce the banking sector’s credit risks. It also stemmed from a labor surplus, particularly in white-collar industries, that encouraged overstaffing in a country where societal norms and legal constraints make it hard to fire permanent employees. Adding non-core business lines was a way of finding a home for oversized workforces.