The sharp market reaction to Sanae Takaichi’s election as leader of Japan’s ruling Liberal Democratic Party (LDP) showed how closely investors are watching the country’s political transition. Her victory initially sent Japanese equities to new highs, weakened the yen, and pushed up Government bond yields (1) as investors priced in the prospect of a more expansionary fiscal and monetary stance, which she has advocated.
The initial optimism on the part of equity investors has been tempered by political turbulence. The departure of Komeito from the ruling minority coalition government has thrown Takaichi’s path to the premiership into doubt.
Coalition negotiations could go on for some time, and opposition parties are exploring ways to form an alternative government. Even so, betting markets still view Takaichi as the favourite to become Japan’s next prime minister; Polymarket currently gives her ascent to the premiership an implied probability of just over 80% (2).
For long-term investors, however, the more important question is not whether Takaichi makes it to the top job, but whether Japan’s improving fundamentals can keep driving equity performance. In this regard, there are grounds for cautious optimism.
Politics may dominate headlines, but the structural case for Japanese equities - built on relatively attractive valuations, ongoing corporate governance reform, and exposure to powerful global investment themes – is likely to remain intact.
Takaichi’s policy agenda
Takaichi’s economic philosophy has strong roots in ‘Abenomics’, the blend of fiscal stimulus, loose monetary policy and structural reform championed by the late Shinzo Abe. In the past, Takaichi has advocated aggressive fiscal stimulus and criticised the Bank of Japan (BoJ) for hiking interest rates, comments that have prompted some to compare her to Liz Truss (3).
However, more recently she has been more restrained, highlighting a desire to boost growth, but also stressing the need for a 'responsible expansionary fiscal policy’. Aware that rising prices have hurt workers’ disposable income, Takaichi is keen to combat inflation and mitigate the negative impact of rising prices on households.
To this end, she has advocated a variety of measures, including tax credits and the abolition of temporary taxes on gasoline in order to boost household spending power (4). However, she has also supported government spending to raise investment in essential sectors such as food, energy, and economic security.
Takaichi is also seen as a dove when it comes to monetary policy. Takaichi has stressed that, while the BoJ has formal independence in setting monetary policy, its decisions should be consistent with the Government’s objectives.
She has noted that Japan’s recent bout of inflation has stemmed largely from higher import and raw material costs rather than robust domestic demand, a point that tempers the case for an imminent rate hike (5).
Takaichi has expressed the view that it would be best to achieve demand-driven inflation, where wages rise and drive-up demand, in turn leading to moderate price increases that lift corporate profits (6).
Takaichi has also indicated she may revisit the 2013 joint statement between the government and the BoJ (7), which set a 2% inflation target as part of efforts to end deflation (8).
To be sure, the current economic backdrop is somewhat different to that in 2013. Back then prices were barely rising (9), but fast forward to today and inflation has been above the BoJ’s target for more than three years (10).
A revision might acknowledge today’s challenge is cost-driven inflation rather than falling prices and could signal a push for closer fiscal-monetary coordination, albeit at the risk of raising questions about central bank independence.
Market implications
If Takaichi manages to secure enough support to become PM and pursue her policy agenda, the prospect of a looser fiscal policy, a loss of independence at the BoJ, and less monetary tightening is likely to put renewed downward pressure on the yen. Meanwhile, higher inflation expectations and concerns that a lack of fiscal discipline could add to Japan’s already heavy debt load (of nearly 240% of Gross Domestic Product (GDP)) (11) would threaten to further lift yields on Japanese government bonds (JGBs).
The yield on the 10-year Japanese Government Bond (JGB) currently trades at around 1.7%, its highest level in over 17 years, and the yield curve could steepen further under a future Takaichi premiership (12). Rising JGB yields could put upward pressure on yields globally, given that sovereign bonds in developed markets are viewed as substitutes by investors.
Moreover, as Japan is the biggest investor in US Treasury bonds - holding around US$1.15 trillion worth of bonds (13) - higher bond yields at home could prompt Japanese investors to repatriate capital, putting upward pressure on US yields. Analysts at Goldman Sachs reckon that ‘a 10-basis point idiosyncratic shock typically translates to 2-to-3bp of upward pressure onto US, German, and UK yields’ (14) .
Equity market impact
Perhaps unsurprisingly, Japanese equity markets have had a more positive reaction to the prospect of looser fiscal and monetary policy under a possible Takaichi premiership. The Topix equity index hit a fresh record high in the wake of her victory, only to dip back somewhat on the news of Komeito withdrawing its support (15).
Many large-cap Japanese companies (e.g. Toyota, Sony, Nintendo etc.) earn a substantial share of their revenues overseas, so when the yen weakens, their foreign earnings (in dollars, euros, yuan, etc.) translate into more yen, raising reported profits. In addition, a weaker yen makes Japanese goods cheaper abroad, boosting export volumes.
Further yen weakness under a Takaichi premiership could therefore be expected to give an added boost to the share prices of Japanese exporters.
Aside from the macroeconomic policy impact, Takaichi has also proposed boosting investment in a range of sectors, including artificial intelligence (AI), semiconductors, nuclear fusion, materials, biotechnology, advanced medicine, and defence. If this comes about, the shares of companies in these sectors can be expected to benefit.
Supportive fundamentals
However, it is important to remember that, while political uncertainty may cause bouts of short-term volatility, other factors are currently supportive of the Japanese equity market. As regards growth, Japanese economic activity has surprised on the upside recently (16), with the economy expanding at a 2.2% annualised pace during the second quarter (17).
Partly as a result of solid nominal growth, corporate earnings are expected to pick up during the coming year. Consensus forecasts point to a 12.5% y/y increase in earnings for MSCI Japan constituent companies in 2026 (18).
Moreover, Japan’s ongoing corporate governance reforms are unlocking shareholder value and resulting in a marked increase in share buyback activity. According to J.P. Morgan, share buybacks hit a record Yen18.7 trillion during the year to March 2025, and are on course to rise further during the current fiscal year (19).
As the transition from deflation to inflation becomes more ingrained in Japan, there is also scope for Japanese households, who have traditionally held much of their wealth in cash deposits, to allocate more of their savings to equities. Since the launch of the expanded Nippon Individual Savings Account (NISA, a tax-advantaged investment account) in January 2024, total assets in the NISA wrapper have risen to Yen53 trillion (20), and Morningstar believes the NISA investment market could reach Yen100 trillion by the end of 2027 (21).
Much of this cash is likely to flow into the Japanese stock market.
Japan’s market performance is further supported by its central role in global supply chains and exposure to expanding industries. The country remains a critical supplier of components and precision machinery for the semiconductor and electronics industries.
In addition, Japan continues to excel in robotics and digital technologies. As a result, the Japanese equity market has benefitted from the ongoing AI boom and is well placed to continue to do so.
Furthermore, although the strong run-up in the Japanese equity market this year has lifted valuation multiples, Japan still remains relatively attractive versus its developed market peers.
The forward price/earnings ratio of the MSCI Japan index (i.e. how much investors pay today for the projected year-ahead future profits of Japanese equities) currently stands at 16.2, compared to a comparative figure of 20.0 for the MSCI World index, and 22.5 for the MSCI US index (22).
Near-term volatility, long-term appeal
Political uncertainty may dominate the headlines in Tokyo, but the case for investing in Japanese equities is about more than the fortunes of a single politician. The structural reforms reshaping corporate Japan, exposure to growing industries, relatively attractive valuations and the gradual mobilisation of domestic savings all suggest continued upside.
Takaichi’s policies, if implemented, could potentially give the market an additional boost through fiscal expansion and a potentially more dovish tilt at the BoJ. However, securing the premiership and the requisite parliamentary support to enact her policy proposals is far from guaranteed, and setbacks on this front could potentially lead to further market volatility.
Even so, despite the near-term political turbulence, Japan’s underlying strengths continue to make a compelling case for patient investors.
16 October 2025
3: https://www.ft.com/content/e1c51ed1-a898-49e6-8902-8c5eedb53ead
8: https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2013/k130122c.pdf
9: https://www.macrotrends.net/global-metrics/countries/jpn/japan/inflation-rate-cpi
11: https://tradingeconomics.com/japan/government-debt-to-gdp
12: https://tradingeconomics.com/japan/government-bond-yield
15: https://www.bloomberg.com/quote/TPX:IND
16: https://yardeni.com/charts/citigroup-economic-surprise/
17: https://www.reuters.com/business/japan-revises-q2-gdp-higher-upbeat-consumer-spending-2025-09-08/
18: https://yardeni.com/charts/gib-japan/
19: JP Morgan Global Equity Strategy October 2025
20: https://www.ft.com/content/d742fa39-e55e-4b76-b7f7-b8d40775d936
21: https://www.morningstar.com/en-hk/business/insights/research/japan-nisa-investment-market
22: JP Morgan Global Developed Markets Strategy Dashboard