Why Japanese Small & Mid Caps Are Interesting

The Opportunity

Japan is the world’s third-largest stock market by market value as of mid-2026. Beyond household names such as Toyota, Sony and Nintendo lies a long tail of small and mid-sized companies, many modest valuations, net cash and little analyst coverage.

Many are global niche leaders, dominating markets in components, materials and machinery. Some also offer exposure to structural themes such as AI hardware and automation, often at more modest valuations than elsewhere.

Even after a strong run, roughly half the stocks on the Tokyo Stock Exchange’s Standard market, which is dominated by small and mid caps, trade below book value.

A couple of things got it there.

The collapse of Japan’s 1980s asset bubble, followed by the banking crisis of the late 1990s, taught companies to hold cash, and deflation made that look acceptable. Cross-holdings and passive shareholders left little room for takeovers or activists. And crowded industries kept margins thin.

Now the backdrop appears to be changing. Inflation is back, the Bank of Japan has raised rates, and capital has a cost again, so idle cash and weak returns on equity are harder to defend. Governance reforms, buybacks, activist investors and take-privates are adding pressure to unlock value.

The Research Gap

Yet the friction for international investors remains significant. Liquidity can be thin, primary disclosures frequently appear only in Japanese, and institutional coverage drops off sharply outside the Nikkei 225. Because of this mispricings can persist for years.

At Nava, we are trying to bridge the research gap with independent, English-language research on Japanese companies that sponsored and institutional coverage rarely reaches. The notes are short and structured, designed to get professional investors quickly up to speed on the business, its key earnings drivers, how value can be unlocked, and the key risks.