The chaos caused by Covid-19 this year has left an indelible mark on global economies. Financial markets experienced historic falls in value as the crisis reached a tipping point in March and whole countries were plunged into public lockdowns.
While the vast majority of global markets have since rebounded, Japan is among the few that have struggled to make up the entirety of the losses.
Nonetheless, that is not to say it has cut off the opportunity for investors. In the equity markets we have found Japan stands out on a number of measures, with one key element being attractive valuations.
Its valuation metrics stand out relative to the rest of world, particularly when it comes to areas such as enterprise value to EBIT, dividend yields, and the strength of company balance sheets. Indeed, there are some companies in the broader Japanese market that are remarkably undervalued.
The second, crucial element that is helping position Japan as a key region for investors is the number of regulatory and governance changes in recent years that have created an environment far more open to shareholders' influence and ideas.
Among the notable changes is the introduction of the Corporate Governance Code and the Stewardship Code in 2014 and 2015 which, in turn, have helped shift mindsets towards greater acceptance of shareholder proposals and working collaboratively with investors.
Taken together, what we find is remarkably cheap valuations and a regulatory environment that now welcomes shareholder engagement - marking Japan out as a key target for activist investors.
Those that are willing to put in the work to support and develop the companies in which they invest can reap major rewards.
Despite what might be perceived as slow progress, Japan's approach to shareholder engagement is changing for the better and quite dramatically. Importantly, there has been a major shift in the attitude of domestic institutional investors, who often hold the key to any corporate votes and decisions.
In the past, the attitude of many domestic companies has often been one of ignoring the 'noise' created by foreign investors in favour of domestic institutions which were only too happy with the status quo. If the home crowd are happy and do not challenge companies, then they are left to simply continue in their old ways.
In 2015 and 2016, less than 2% of domestic institutional investors voted 'yes' to shareholder proposals in Japan, yet this figure had jumped to more than 8% by 2019 - a relatively short time span of just three years.
With this shift in pressure from domestic investors increasing, we are now starting to see a similar shift in management and their openness to change. They are beginning to realise that they cannot continue with the status quo and times are changing.
So, how can investors make the most of this growing opportunity to work successfully with Japanese companies to unlock the incredible value on offer?
Ultimately, as investors, we are trying to generate returns through a number of areas, such as working with management to grow corporate value, crystallise privatisation, ensure appropriate governance oversight, and explore and encourage merger opportunities.
Adopting a positive, constructive, and long-term agenda is crucial to enable us to do this.