Japan Public Markets Under Attack

Be like Buffett: Can Japan keep public markets working for the public good?

Warren Buffett and the GPIF find much to admire about Japan’s public companies as they operate today while private equity and their activist investor peers insist that Japan needs more financial engineering to thrive. Who is right?

On October 31, 2025 Asia Society Japan hosted a panel discussion led by long-term insiders and practitioners Jesper Koll, Robert Feldman, Andrew McDermott, George Olcott, and Alicia Ogawa. I trust you will enjoy the recording of this seminar. As always, comments welcome & many cheers ;-j

Please click here for the session: Japan Public Markets

A big Thank You to Asia Society Japan

Click here for video

Teaser :

Japan’s capital markets have evolved and embraced greater focus on capital efficiency and shareholder returns. At the same time, the virtues of Japan’s existing governance system have become apparent in geoeconomic terms. Engineer-led Japanese companies have outperformed MBA-led global competitors in industry after industry thanks to a relentless focus on best-in-class engineering, operational efficiency, product innovation, “kaizen,” and the equitable sharing of benefits among all stakeholders. Yet the stable and strategic capital allocation that has empowered industrial resilience contrasts with the financial engineering model that has animated the private equity industry and its many public market admirers.

Should Japan follow the advice of former SEC Chairman Arthur Levitt and compete with the private equity model by improving its own public markets, becoming a global leader in the process? What are the economic, social, and national security risks of Japan following the private equity model? Can Japan afford the human capital required to build out a US-style private market infrastructure at a time of demographic tightening? Could a stronger and more equitable Japanese public market provide an example for the Global South and the US?

Nitobe Speaks

Andrew McDermott used the following quotes in his talk. The purpose was to highlight that these remarks were given in friendship, not as a personal criticism, that they applied as much to America as Japan, and that the allocation of human capital is as important as financial capital.

But take it, if the smack is sour/ the better for the embittered hour

It should do good to heart and head/when your soul is in my soul’s stead

And I will friend you if I may/in the dark and cloudy day. AE Houseman

We’re throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services into activities that generate high private rewards disproportionate to their social productivity. Nobel prize winning economist James Tobin, 1989

Every thinking bushi knew that money formed the sinews of war, but he did not think of raising the appreciation of money to a virtue. Nitobe, Bushido

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Japan confronts a choice: will Alicia be right in predicting that KKR will own 40% of its (small cap) stock market in 5 years, or will Japan choose to apply kaizen to a public market model that is good enough for Warren Buffett, the GPIF, and yours truly. Those of us on this stage can’t make that choice. We can lay out the evidence of what’s happened so far in Japan and abroad. We can explain why we think that Japan already has a “capitalism that works” better than anything PE offers. But, ultimately, it is Japan’s citizens who need to tell Japan’s story better….or risk having it written by someone else.

Fortunately, Japan has a model for how to do this. I want to thank my first boss, Mr. Fukushima, who is here today, for introducing me to the work of Nitobesan, writer of a book called Bushido. As many of you know, Nitobe wrote at a time similar to our own in which a new order was emerging in Asia. He wrote to describe Japanese ethics to the West using impeccable English and drawing on examples from both sides to show that core virtues and vices were quite similar once you did your homework. He was so successful that President Theodore Roosevelt distributed the book to his entire White House staff, made them all take Judo lessons, and wrote this to Congress-

[The Japanese] have won on their own merits and by their own exertions the right to treatment on a basis of full and frank equality…We have as much to learn from Japan as Japan has to learn from us; and no nation is fit to teach unless it is also willing to learn.

Interestingly, this is almost exactly what Warren Buffett has said about Japan. As for our President, I don’t think that we can expect Mr. Trump to start taking judo lessons on the White House lawn, but I do think that a “new Nitobe” could help America and the rest of the Indo-Pacific understand the benefits of Japan’s public market model. The new Nitobe, just like the old Nitobe, would base his argument on specific examples from both sides. He’d break his case into four points

• Japanese public equities are underrated

• Private equity is overrated and overexposed to the PRC.

• The players (and incentives) matter.

• We can learn from each other

I’m going to spend one minute on each of these points. They all tie into the same idea: the Japanese public market system, while not perfect, is the best in the world right now. It’s best because it’s putting the best players on the field at the lowest cost…imagine the Dodgers with the lowest payroll in the MLB and you get the idea.

Point 1: Japanese public equities are underrated. Just look at the stats from my friend John Thorndike at GMO, Ulrike Schade and Jesper. All show that the operating performance, as distinct from relative stock market performance, has been world-beating for several years. And this performance has not come at the expense of financial resilience, community engagement, returns to shareholders or technical competence, particularly in fields that really matter right now. Japan is the quality leader from ships to chips to AI-enabled manufacturing to animated content. The fact that stock market investors have not recognized this performance is not management’s fault, it is the fault of the backwards-looking, complexity loving, narrative-driven investment management industry itself. And even this so-called underperformance story is incomplete. Compare the realperformance of the GPIF with CALPERS or any other “alt heavy” pension fund that has paid higher fees, hired thousands of extra people, and created enormous complexity. The numbers speak for themselves. This is what attracted Warren Buffett. And, looking ahead, who is more prepared for today’s world: Sony/Hitachi/IHI/KHI/MHI/Okuma/Nintendo or Intel/GE/Boeing/Disney/RTX/LMT and HHI? [NB-sorry for the tickers, but this is a good time to mention that this is NOT investment advice].

Point 2: PE is overrated and overexposed to the PRC. The new Nitobe would contrast Tungaloy and Denso with the twice-bankrupt Calsonic and the recently bankrupt First Brands. He’d compare Toshiba Memory with Sony/Hitachi and PHC with FujiFilm or BML. And, finally, he’d urge you all to study Houdaille/Burgmaster, the example KKR’s Henry Kravis gave the Nikkei last year when explaining what KKR can do for Japan. He’d note that Houdaille made a ton of money for KKR but bankrupted its Burgmaster machine tool business in the process, contributing to the decline of American manufacturing. Its former competitor Okuma, on the other hand, still thrives as a public company on the bleeding edge of AI enabled manufacturing, still faithful to the founder’s commitment to “advanced technology and good labor relations.”

He’d then observe that the one place that PE investments seemed to help grow companies is in the PRC. He’d note that just last month, Bain announced a successful $4bln investment in China’s AI/datacenter market and the Shanghai branch of the Chinese Communist Party celebrated KKR’s first ever RMB fund raising. In a world in which Japanese public companies are being forced to choose between the PRC and the West, he’d wonder why Japan doesn’t ask the same thing of the PE firms who are so eager to take over its leading companies.

Point 3: Charlie Munger famously said: show me the incentives and I’ll show you the outcome. The finance-first model incentivizes managers to raise money and do deals, not to make things. When you incentivize companies to make things, you get managers who are good at making things. This is not a cultural difference: Japan had the same problem in 1989 when its bankers were in charge of allocating cheap capital. And what Japan is doing now is simply what America did in the 40s and 50s-letting makers lead while putting finance in a support role. This is less about public vs. private markets and more about incentives. So in the US, the same people running the PE companies are running the worst-performing public companies. Look at the backgrounds of Greg Hayes at RTX, Doug Calhoun and Jim McNerney at Boeing, Bob Swan at Intel, and basically everyone at GE-all accountants, investment bankers or consultants. Meanwhile, the CEOs of IHI, MHI, Okuma, KHI, Nintendo and almost every other Japanese company got there by doing things. It’s not hard to understand. It’s the basic principle the Dodgers follow.

And that brings me to my last point– a hopeful note that I think Nitobe would approve of. We can do this. In fact, we are doing this, and not just on the baseball field. When you put Japanese engineering together with Western engineering, unsurprisingly, you get the best of both worlds. That’s what Palmer Luckey is doing at Anduril on the defense side. More hopefully, it’s what Newell has done in my home state of Tennessee. Its new CEO decided to bring the manufacture of Sharpie pens back from the PRC to the town of Maryville, a town that also happens to be the HQ of Denso. Denso has invested in Maryville for decades, building the highschool that my partner Yohei and my wife Kelly attended and supporting the technical school that Newell used to train its employees on automation equipment purchased from a Toyota affiliate. No jobs were lost, average salaries increased 50%, over $2bln was invested, and quality improved.

I think that Nitobesan would first thank George for his hard work on the Denso board that helped make this story possible, then he’d look at all of us and ask: “what do we need to do to have more Newells, Densos and Tungaloys and fewer Calsonics? What can we do to keep these public markets working for the public good, and not simply for the good of financial engineers?” I’ll ask the panel the same questions.

The opinions expressed are my own. They are not intended as investment advice. I currently own and may in the future own positions in securities mentioned in this article. Andrew McDermott, Nashville 10/23/25