Following Japan’s 25bps rate hike on 18th December, opinion seems split on whether Governor Ueda’s comments are dovish, hawkish, or anywhere in-between, though CC Japan Income & Growth Trust PLC’s portfolio manager, Richard Aston, believes the stage has been set for a new era of investment opportunity in Japan.
“The upward trajectory of Japanese rates remains clear, and the BoJ have stuck to their strategy of employing a wait-and-see approach to the timing of such hikes. We prefer to look through the short-term volatility and not attempt to read the tea leaves at the bottom of the BoJ’s cup. While the Yen has weakened further, implying the market as a whole sits in the dovish camp. From our point of view, nothing has changed,” he said.
Since Q2 2025, there has been a ~13.5 trillion yen net inflow from foreign investors to the Japanese equities market, spurring the TOPIX to surpass 3,000 and the Nikkei 225 to exceed JPY 50,000 for the first time. With Corporate Governance reform a major driving factor in the fortunes of Japanese equity markets, Aston says that further revisions to Japan’s Corporate Governance Code in 2026, could bolster the country’s equity markets even more.
Key expected aspects of the 2026 revision include:
- A re-assertion that the Code remains a principle-based “comply or explain” framework — companies must explain the rationale behind governance approach, rather than box-ticking.
- Strategic capital allocation: Companies must demonstrate how they use cash and retained earnings rather than hoarding capital.
- Enhanced transparency: Clarifying the purpose of cross-shareholdings and disclosing ultimate beneficial ownership.
- Mandatory sustainability: Implementation of internationally aligned standards via the Sustainability Standards Board of Japan (SSBJ).
- Real engagement: A push for meaningful dialogue between companies and institutional investors.
These latest developments coincide with the tenth anniversary of the CC Japan Income & Growth Trust PLC, marking a significant milestone that aligns with a decade of profound transformation in Japanese corporate governance. Sweeping corporate governance reforms have helped to change the perception of Japanese equities.
Previously regarded as low-growth, cash-hoarding “value-laggards”, Japanese companies are now recognised globally as attractive investments, distinguished by their focus on dividends and returning value to shareholders.
A Decade Defined by Transformation
Richard Aston, Portfolio Manager of the CC Japan Income & Growth Trust, says: “Over the past decade, Japanese companies have shifted toward stronger shareholder returns, disciplined capital allocation, and more engaged management. This focus has fostered a robust market of high-quality, income-generating firms and reflects Japan’s ongoing commitment to corporate reform.”
These changes began in earnest with the 2015 introduction of Japan’s first corporate governance and stewardship codes, which pushed companies to:
· Increase cash returns through dividends and share buybacks
· Improve transparency and disclosure
· Strengthen board independence
· Engage more openly with investors
Aston says: “Momentum has accelerated dramatically in recent years as the Japan Exchange Group (JPX) introduced and enforced initiatives that publicly name companies that fail to act on requests to improve corporate value. The message has been unequivocal: evolve or reconsider your place in the public market.”
“As a result, Japanese companies are poised to increase dividends for the fifth consecutive year, even amid market volatility, and share buybacks in April surged to nearly three times their level from the previous year highlighting the growing commitment to returning capital to shareholders. Cross-shareholdings continue to unwind at a rapid pace while average return on equity has strengthened from 8.4% to 9% in 2025.
“The difference between the corporate Japan of a decade ago and the Japan we see today is stark. Companies have become notably more efficient and transparent, with a renewed alignment towards shareholder interests. This shift has substantially increased opportunities for long-term, income-focused investors broadening the landscape for investment in Japanese equities.”
Looking Ahead: A New Phase of Reform
While the first decade of reform focused primarily on company-level improvements, the next wave is expected to take an even broader, macro-level approach. A central issue: Japan’s long-standing tendency for corporates to hold excessive cash.
Aston explains: “Prime Minister Sanae Takaichi has made clear her intention to encourage companies to redeploy their cash into the broader economy through wage increases and capital investment, reducing pressure on government spending.
“Next year’s update to Japan’s Corporate Governance Code is widely expected to reflect this shift, ushering in a new phase of growth for corporate Japan. A more assertive framework around capital allocation has the potential to meaningfully strengthen long-term earnings growth, we expect to see substantial scope for further valuation improvement.”
