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�ʴǻ峦������:��CIO Jumpstart, with Christopher Swann on the US shutdown, the Fed, and the pharmaceutical sector.
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Japanese equities rallied on Monday after the surprise selection of Sanae Takaichi as the new leader of the ruling Liberal Democratic Party (LDP), setting her on course to become Japan’s first female prime minister. The Nikkei 225 Index jumped 4.8% to a record high, while the broader Topix rose 3.1%, as investors positioned for a more expansionary fiscal agenda and anticipated a dovish monetary outlook. The yen declined around 1.8% against both dollar and 1.4% against the euro, while the 30-year JGB yield climbed as much as 12 basis points to near 3.28%.

The new LDP leader’s policy platform centers on tax cuts, economic stimulus, and targeted investments in sectors such as semiconductors, AI, and national security. She has pledged to abolish the provisional gasoline tax surcharge, raise the threshold for taxable income, and introduce a sizable support package to boost both consumption and capital investment. Her growth strategy also includes subsidies for strategic sectors, efforts to position Japan as a global financial center, measures to improve productivity among smaller companies, and initiatives to boost public infrastructure. Based on her recent remarks, a large-scale stimulus package aimed at lifting consumption and investment is likely to be announced before year-end, with further increases in national security spending and income tax cuts possible over the medium term.

Despite the market’s initial optimism, political negotiations remain fluid, and questions about fiscal sustainability and the pace of monetary normalization could still introduce volatility. With the LDP still a minority in Japan’s parliament, whether her policies can be implemented fully remains to be seen.

Still, we believe the cross-asset market reaction offers a reasonable proxy for the direction of travel going forward:

Expansionary policy should provide a near-term tailwind. A combination of tax cuts, targeted subsidies, and a sizable economic support package is likely to boost both consumption and capital investment. This policy mix should underpin corporate earnings growth and support domestically oriented sectors, particularly those tied to infrastructure, technology, and national security. While the ultimate scale of stimulus will depend on coalition negotiations, the immediate effect is a clear positive for Japanese equities.

An accommodative monetary policy bias should support risk assets. Takaichi’s dovish approach to monetary policy has reduced market expectations for imminent Bank of Japan rate hikes, supporting equity valuations and providing a buffer for rate-sensitive sectors. The weaker yen further enhances the competitiveness of Japanese exporters, while the prospect of continued low rates should help keep borrowing costs contained. Although a delayed normalization path could eventually raise inflation and fiscal concerns, the near-term environment remains constructive for risk assets.

Valuations and earnings momentum remain attractive. Japanese equities continue to trade at a discount to global peers, even as earnings growth is set to accelerate into next year. Structural reforms, improving shareholder returns, and ongoing buybacks all offer additional support, and are increasingly recognized as a potential source of outperformance for individual stocks against the broader market. While political instability and fiscal slippage remain risks, history shows that election periods and policy shifts often coincide with periods of outperformance for the Japanese market, offering potential entry points for long-term investors.

So, we view Takaichi’s surprise ascension as a significant pivot for the Japanese economy. When we upgraded Japan equities to Attractive in the middle of last month we factored in potential political outcome upside complemented by an attractive relative valuation. With Monday’s sharp rally, the Topix is now trading at 15.9 times forward price-to-earnings, which we think remains reasonable in relative terms with a 29% discount to the S&P 500’s price-to-earnings ratio, in line with five-year average.

We recommend a diversified exposure to Japanese stocks, focusing on sectors benefiting from fiscal stimulus and structural change, including domestically oriented sectors and those tied to capital investment and national security. In terms of domestic sectors, we like IT services, real estate, and medtech in the near term, and believe defense, semiconductors, AI-related firms, as well as industrials, machinery, and materials would benefit from government policies in the medium term. On the currency side, we expect some depreciation of the Japanese yen in the short run as expectations erode for rapid policy normalization, though we retain our medium-term conviction for broad US dollar weakness. We also note that the current BoJ stance is already on the cautious side. Investors should remain alert to the risks of political instability, fiscal slippage, and a potentially more volatile path for monetary policy.