Cheap, under-owned and reforming: Why Japan Is back on the map for investors

Japan is experiencing a snowball moment in its stock market, and the Forager International Shares Fund investment team has increased exposure to the country.

Recently, Portfolio Manager Harvey Migotti and I returned from ten days in Japan.

Our schedule was packed: the Mizuho Japan Alpha Conference, the Launch Point Small Cap Conference, and more than 30 management meetings. Back in Sydney, we joined Daiwa’s Japan Exchange Group Conference, where we met with Hiromi Yamaji-san, CEO of the Tokyo Stock Exchange.

The contrast with five years ago was stark. Conference rooms that once sat half empty were overflowing. International investors that ignored Japan for decades were now showing up in force. And the reason is simple: change that has long been promised is finally visible in company results, capital allocation, and stock prices.

Increasing exposure to Japan

Two years ago, Japan was just 5% of the Forager International Shares Fund. Today, it is nearing 20%. That shift reflects not just what’s happening in Japan, but what isn’t happening elsewhere. US markets remain our anchor at 45% of the Fund, but valuations there are stretched. Japan, by contrast, trades on 16 times forward earnings, with half of listed companies still below book value. Cheap, under-owned, and now reforming – that’s the combination that has pulled us deeper into the market.

The turning point came in March 2023, when the Tokyo Stock Exchange demanded that companies become “conscious of cost of capital and stock price.” It sounded vague, but the effect has been profound. Yamaji-san described it as a giant snowball that had been pushed across a flat surface for years. Slow, heavy work – but now it is rolling downhill under its own momentum.

Peer pressure is doing the work. More than 90% of Prime market companies have now disclosed improvement plans. Those with credible strategies have outperformed sharply, returning 67% since March 2023, versus just 17% for those without. The market is rewarding better governance, and management teams are responding.

The numbers on capital returns are extraordinary. Buybacks doubled to ¥20 trillion in 2024, and another ¥14 trillion has already been announced this year. Dividends plus buybacks now return about 5% of market cap annually, double the US equivalent. Crucially, more companies are cancelling the shares they repurchase, locking in permanent earnings accretion.

Activism and M&A increase the snowball effect

Reform has opened the door to activism and M&A. Domestic investors are pushing harder, with CEO approval votes slipping toward 50% in some companies. Poison-pill defences have largely disappeared.

Foreign bids are also flooding in. Overseas firms lodged 157 takeover proposals in the first eight months of 2025, already close to last year’s record. Policy changes now require boards to give “sincere consideration” to credible offers, limiting the ability to brush them aside. For the first time in decades, Japan is an open field for corporate activity.

Demographics are forcing the change

Japan’s demographics, usually discussed as a headwind, are in fact forcing change. More than 2.4 million SME owners are over 70, and half have no successor. Left unchecked, that would mean millions of lost jobs and a significant hit to GDP. The obvious outcome is consolidation. For listed companies with balance sheet strength, opportunities to acquire are multiplying.

At the same time, labour shortages are driving productivity gains. Wage negotiations in 2024 delivered 5% increases, the largest in 30 years. In Japan, higher wages often coincide with higher margins, as companies rationalise and modernise to cope.

This combination – governance reform, corporate activity, and demographic pressure – is what makes this Japan cycle different. The snowball has started rolling, and for investors prepared to do the work, it is gathering speed.

Where we're finding opportunities in Japan

Reform is the backdrop, but this isn’t about just owning the index. Japan has around four thousand listed companies and plenty of them are cheap for a reason. Our job is to find the ones with tailwinds strong enough to matter.

Three stand out. Labour shortages, legacy IT systems, and a culture finally willing to change. That combination is creating opportunities in areas that have been stagnant for decades.

The Digital Cliff

Japan still spends around 90% of its IT budget patching up old systems. More than 60% of corporate IT platforms are over twenty years old. Policymakers call it the ‘2025 digital cliff.’ These systems are past their use-by date. At some point they will break, and replacement is inevitable.

At the same time, there aren’t enough workers to go around. The population is shrinking, the workforce is shrinking faster, and wage growth is the highest it has been in decades. If you’re running a business, that means you have to do more with less. Productivity tools are no longer a nice-to-have. That urgency is fuelling demand for software and platforms.

Back-office accounting software hardly sounds exciting. But OBIC Business Consultants (JP:4733) has turned it into one of the better businesses in Japan. Its Bugyo suite handles accounting, payroll, tax and HR for hundreds of thousands of small and medium-sized enterprises. Once embedded, clients rarely leave, delivering margins that most global software firms would envy. The company has been migrating its loyal customer base from on-premise systems to the cloud over the past few years. That allows for upselling of new services and deepens its moat. Japan’s digital cliff is OBIC Business Consultant’s opportunity.

Solutions for Large Corporates

At the other end of the spectrum are Japan’s large corporates, very slow to change and still reliant on systems written decades ago. This is where micro-cap company DreamArts (TSE:4811) comes in. Its SmartDB no-code platform allows frontline staff to build the tools they need without waiting on IT teams. Other products target communication and workflow bottlenecks across banks, manufacturers, and government agencies. These projects can require decade long commitments due to complexity. The cost of inefficiency in these organisations is enormous, and DreamArts offers a rare path to improvement.

Recruitment in Japan is Changing

Labour shortages and rising wages are also reshaping the recruitment industry. Visional (TSE:4194), through its BizReach platform, has become the dominant channel for professional, mid-career hiring. The platform has a leading market share in Japan, with a user base of over 2.5 million high-income white-collar job seekers. Growth has been consistent, margins strong, and management disciplined in reinvestment. For a business compounding earnings at around 20%, the valuation looks undemanding.

The cultural backdrop in the labour market matters. Lifetime employment is becoming less entrenched. One in three graduates now expects to switch jobs throughout their career. Prospective job changers have been on the rise since Covid and exceeded 10 million individuals for the first time in 2023. The era of major job transitions has begun. Employers and recruiters desperate for talent are paying to access Visional’s growing pool of eligible candidates. And every new participant makes the platform more valuable for the next one. It’s a network effect.

Digitisation in Health

Healthcare is another sector ripe for digitalisation. Japan’s home nursing market is expanding rapidly as the population ages and hospitals push patients into home-care. Yet most of the country’s 17,000 nursing stations still run on paper or Excel. Nurses spend up to a third of their time on administration, worsening an already severe labour shortage.

This is where eWeLL (TSE:5038) has carved out a niche. Its iBow platform is Japan’s leading cloud product built specifically for home-visit nursing, covering everything from medical records and care planning to scheduling, billing, and compliance. The business model is simple and aligned: stations pay a base subscription plus a small per-visit fee. More patient visits mean more revenue for both sides. The product is sticky. Churn is close to zero. Today iBow supports more than 3,000 nursing stations and 740,000 patients, giving eWeLL a scale advantage and a dataset that rivals can’t match. Penetration is still only about 18%, leaving a long runway as the market continues to grow.

What Forager Owns

The Fund owns seven Japanese software companies, each serving a different end market but all benefiting from reform, an ageing workforce, and the urgent need to digitise. They are not just cheap stocks. They are growth businesses backed by long-term structural tailwinds.

For Forager, that is the attraction. Japan offers the combination we look for: undervalued markets, visible change, and companies we can meet, question, and back for the long haul.

That is why almost one-fifth of the Forager International Fund is invested in Japan.

If you are interested in finding out more about the Japanese stocks we hold, and others on our watch list, subscribe to Forager’s monthly and quarterly reports.

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