The mid-2026 revision of Japan’s Corporate Governance Code has been scheduled for years. It is now arriving. And the market is still not fully positioned for what it means.

Here is the context. For most of the past decade, Japanese companies were famous for one thing: sitting on enormous piles of idle cash, maintaining low returns on equity, and managing cross-shareholdings that insulated management from accountability. The Tokyo Stock Exchange began addressing this in 2022 with a series of reforms targeting companies trading below book value. Companies that failed to improve were placed on a public disclosure list.

That was the first phase. The second phase is now.

The upcoming revision of the Corporate Governance Code is targeting the ‘idle cash’ problem directly — forcing companies to articulate specific capital allocation strategies and accelerating the unwinding of cross-shareholdings. The TSE is also moving toward delisting companies that have not made sufficient improvements to earnings growth and capital efficiency. This is no longer naming and shaming. It is structural pressure with consequences.

The macro backdrop is reinforcing the equity story. Japan’s large manufacturers’ sentiment index rose to 22 in Q2 2026 from 17 in Q1 — the highest level since Q1 2018, and well above the expected reading of 16. Large firms now see capital expenditure up 11.5%, compared to 3.3% in Q1. That is a meaningful acceleration. The Takaichi administration’s fiscal package — part of a broader ¥21.3 trillion stimulus — is providing additional runway for domestic demand, particularly in semiconductors, AI, and defense infrastructure.

The Bank of Japan is normalizing rates in parallel. Higher BoJ rates support Japanese banks directly through expanding net interest margins, and the gradual yen appreciation that typically accompanies rate increases is now a tailwind for Western investors holding unhedged positions rather than a headwind.

Net purchases of Japanese cash equities reached roughly ¥5.4 trillion — approximately $35 billion — in 2025, according to data from the Tokyo Stock Exchange. That is 35 times the volume of the previous year. But longer-term inflows remain low compared to the early Abenomics period, and many Western portfolios still carry less than 5% Japan exposure. The institutional catch-up trade has started but is not finished.

What’s interesting is the sector composition of the opportunity. The obvious play — exporters benefiting from a weak yen — is mostly behind us. The yen tailwind has already been partially priced. The emerging opportunity is in domestic sectors being re-rated as governance improves: banks, insurers, and overlooked names in telecoms and retail that trade at discounts to historical averages precisely because reform pressure hasn’t reached them yet.

Governance-related activist campaigns are increasing. The mid-2026 code revision is expected to accelerate this. Companies with excess cash and low ROE are the specific targets — and there are a lot of them still left in the TOPIX.

The risk is not the Japan story itself. The risk is that improving conditions elsewhere — a Fed that pivots, a stronger U.S. earnings cycle — pull capital back toward American equities before the governance re-rating finishes. Japan-China relations also remain a variable that can shift quickly.

But for investors who have been waiting for the right entry into a structural governance story with real institutional tailwinds, this is probably the closest the setup gets to obvious before it stops being underpriced.

The reform code drops this month. Most portfolios haven’t moved yet.