Since Warren Buffet started to take a tentative interest in Japan, buying into five Japanese trading houses — Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo, international investors have followed suit. The Financial Times reports that overseas buyers had racked up a 12-week run of net buying in Japanese stocks by mid-June. Over the past three months, foreign investors had ploughed $43bn into the market, according to Nomura Securities.

The reasons for this new-found interest have been well-flagged: over the long-term, it is the corporate governance reforms, put in place in 2012, finally started to see fruition. However, the immediate catalyst has been the Tokyo Stock Exchange’s promoting of a ‘soft’ requirement for Japanese listed corporates to achieve a price-to-book ratio above one, alongside a raft of other measures to encourage better capital efficiency. Rising inflation after decades of deflation has also been an important factor.

This has seen the Japanese stock market rally in the expectation that companies will start to do good things – invest their cash balances, raise prices, use capital more efficiently. However, the companies likely to see the greater uplift are not the companies where foreign investors are putting their capital. To this end, the export-focused Nikkei 225 has risen more than the more domestic Topix index – 24.2% versus 18.9% for the year to date.

Equally, small and mid caps have been almost entirely overlooked in the rally since the start of the year. This has been difficult for companies such as Baillie Gifford, who focus their attentions on this part of the market.

The problem for international investors is that companies such as Sony are already good companies, with strong corporate governance and effective capital allocation. They are unlikely to benefit significantly from the changing rules. Equally, they sell their products internationally, and are therefore unlikely to get the same boost from domestic inflation.

Paul Green, investment manager on the multi-manager people team at Columbia Threadneedle, says: “The businesses ripest for change are those that are cheap, have large amounts of cash on their balance sheet, depressed profitability, and a low pay-out ratio… it’s crucial to adopt an active approach to identify those companies that are most open to change.” Investors need to be careful how they navigate this rally.