In 2014, then-Japanese Prime Minister Shinzo Abe initiated a corporate governance reform aimed at improving transparency and performance in Japan’s stock market, where the government held significant stakes. The program called for greater engagement by institutional investors and introduced clearer guidelines on board transparency and accounting standards. These changes opened new opportunities for investors targeting small and medium-sized Japanese companies, particularly those traditionally resistant to foreign involvement.

Seven years after these reforms began, the Nippon Active Value Fund (NAVF) adopted a dedicated activist investment strategy to capitalize on the evolving corporate environment. The fund, managed by longtime Japan expert Jamie Rosenwald, focuses on undervalued firms, especially those trading below book value or generating returns on equity under 8 percent, as mandated by the government to announce improvement plans starting in 2023. Despite these efforts, nearly half of Japan’s publicly listed companies still trade below book value.

Many smaller firms face structural challenges such as a shrinking working-age population, limited human resources, and difficulty with management succession. NAVF concentrates on companies typically led by “salarymen”—risk-averse managers who prioritize cash hoarding, avoid equity ownership, and benefit from extensive cross-shareholdings. These firms often invest heavily in non-core assets such as property or art, which can constitute over half of their asset values. This dynamic creates potential for unlocking shareholder value as hidden corporate wealth is reallocated or returned to investors.

Paul ffolkes Davis, co-founder of NAVF and chairman of its investment adviser Rising Sun Management, notes that cultural acceptance of low valuations among Japanese management poses a significant challenge. He describes the fund’s role as “disturbing the sleeping patterns” of firms that are fundamentally sound but poorly managed. NAVF currently holds a concentrated portfolio of 27 investments, valued at approximately £450 million, a substantial increase from £103 million in 2020.

One of the fund’s largest stakes is in Eiken Chemical, a company specializing in genetic testing and colorectal cancer screening, sectors expected to grow with Japan’s aging population. Eiken’s strong balance sheet and excess cash reserves make it a prime candidate for activist intervention, with NAVF holding close to a 10 percent position.

The fund carries an undrawn borrowing facility of £70 million and maintains about £10 million in cash. It does not hedge its currency exposure, meaning fluctuations in the yen versus the British pound affect UK investors' returns. Since its inception through mid-2025, NAVF’s portfolio rose 231 percent in yen terms but only 141 percent in sterling due to yen depreciation. A potential normalization of Bank of Japan interest rates could strengthen the yen, benefiting investors and reducing corporate import costs.

NAVF’s investment approach involves higher risk but has yielded tangible results, including a 5.52p dividend last year—a 70 percent increase from the prior year—equating to a 2.5 percent yield. The fund recently achieved a 17.4 percent return on capital, with its share price approaching net asset value of 233p. While not suited for the cautious investor, NAVF illustrates the potential rewards of active engagement in Japan’s underappreciated market segment.