Interview, Conference Presentation
Why Japanese Stocks Could Keep Rallying
- Pro-growth policies and LDP-led supermajority outcomes are expected to shift global investor perceptions, with historical data suggesting an average 20% market increase in the three months following such elections, peaking at a three-point higher P/E multiple before settling to a two-point premium.
- Political stability under Prime Minister Takeuchi is projected to last longer than the post-WWII average tenure of 1.5 years, potentially extending until the 2028 Upper House election, thereby reducing the market risk premium and lowering the likelihood of fiscally damaging populist measures.
- Investor clarity on defense, economic security, and US-Japan relations is anticipated to increase ahead of the March 19th summit with President Trump, while expectations for structural and corporate governance reforms remain elevated.
- The market cycle, initiated in autumn 2022, has seen the TOPIX more than double, with future upside predicted despite entering a more challenging "delivery phase" requiring tangible proof of corporate change, including ROE improvement via aggressive shareholder returns, M&A, and restructuring.
- Valuation re-rating in the next phase relies on aligning top-down regulatory pressure from the TSE, METI, and FSA with bottom-up investor engagement, supported by mutual fund data indicating Japan remains underweight globally and foreign positioning is not yet stretched.
- While the base case outlook for 2026 assumes a positive trajectory, risks include potential policy shifts unsettling bond or FX markets, health or political scandals regarding the Prime Minister, and external shocks such as US economic downturns or geopolitical events.
- Historical market behavior shows corrections greater than 5% peak-to-trough occur approximately three times annually over the past four to five years, though the current fiscal and political backdrop generally supports higher Japanese equities relative to the US.
- The 2028 election poses a risk for the two-year consumption tax cut pledge on food, as raising taxes again then could be politically difficult, and continued outperformance of the Japanese market against the US on a dollar-adjusted basis is expected to drive further foreign flows and geographic diversification from US allocators.