Earnings season always carries huge importance but Japan’s most recent one had more riding on it than most. As we have been highlighting for some time, just over two years ago the Tokyo Stock Exchange introduced a requirement that by Spring 2025 – i.e. right now – listed companies must clearly explain how they intend to use their capital.

This earnings season made one thing crystal clear: the game has changed. The clearest sign of that is the recent surge in share buyback announcements. The first two months of the fiscal year delivered a record-breaking pace of buyback declarations, already exceeding the total announced across all of 2023, a year that itself set a new high.

What is particularly striking is that this has occurred against a backdrop of market volatility which has weighed on corporate earnings’ forecasts. In fact, the overall market is currently projecting a slight decline in earnings through to March 2026. The real focus of this earnings season, though, was always on other things.

Uptick in M&A

We saw two clear trends in the wider market as well as across our portfolio – an increase in M&A and higher shareholder returns.

The first of those came in the form of tender offers for two of our parent/child subsidiaries.

Torii Pharmaceutical: Japanese drugmaker Shionogi announced it would acquire Torii Pharmaceutical, the pharmaceutical subsidiary of Japan Tobacco, in a $1bn acquisition. The announcement came after both Japan Tobacco and Torii Pharmaceutical separately came under pressure from activist investors to improve governance across the group structure that we saw as inefficient and posed material risks for minority investors; an acquisition was extremely likely.

Toyota Industries: Toyota Industries’ shares have surged following reports it may soon accept a buyout offer from Akio Toyoda, chairman of Toyota Motor Corporation. According to multiple media sources, a formal announcement could come as early as June, with Toyota Motor and its affiliates reportedly considering borrowing up to ¥3trn (approximately $21bn) to fund the deal. Shares in Toyota Industries have risen more than 35% since the news first broke in late April.

Japan’s ongoing shift away from complex parent/child listings, under growing pressure from the Tokyo Stock Exchange and activist investors, is expected to continue. Historically, there were over 400 such listings in the Japanese market which, as of today, is under 200. We expect to see a further reduction in the coming years and it remains a key focus for the portfolio.

Emphasis on shareholders

The second, is shown by significant improvements in shareholder returns, two examples of which are from our own portfolio.

Argo Graphics: Argo Graphics made headlines with the announcement of a substantial buyback – 20% of outstanding shares – to be acquired at a discount from its parent company SCSK*. The company also announced a dividend increase of 50% as it moved to target higher payout ratios. It signals a more proactive capital allocation strategy and is a welcome response to ongoing governance reform pressure. The buyback will have a significant impact on forward valuations and our expectation is for the company to continue the heightened level of shareholder returns.

Jafco: At Jafco, Japan’s leading venture capital firm, efforts to enhance shareholder returns are beginning to take shape. The firm announced an annual dividend of at least ¥133 per share for 2025, up from ¥88 the previous year, and launched a ¥5bn share buyback programme. Just as significant is the strategic pivot: Jafco will exit overseas investments to focus solely on domestic opportunities, citing stronger returns at home and limited progress in raising third-party funds abroad. With fewer capital demands going forward, the company has committed to a new policy: dividend payouts will now be based on the greater of 50% of net profit or 6% of prior year-end equity. Combined with a target return on equity of 10-15% by 2027-29, the message is clear – shareholder returns are firmly back in focus.

Outlook

Over the past two years, much of the focus has centred on the Spring 2025 deadline set by the Tokyo Stock Exchange. The exchange has called on companies, particularly those trading below book value, to present credible plans for how they manage their cash, investments and shareholder returns. The goal is to enhance capital discipline and drive long-term value creation.

However, the narrative is now evolving. With the initial wave of capital allocation plans disclosed, investor attention is shifting from companies that have fully embraced the changes to those that have merely tried to tick the box.

For us, this shift plays directly into our investment strategy. We have long focused on building a portfolio of high quality and undervalued businesses with strong fundamentals and the market is now beginning to reward those same characteristics. As scrutiny intensifies, we believe this environment will continue to favour our approach.

* not held