- Nikkei 225 hits new record high in anticipation of stimulative fiscal and monetary policy
- Japanese stocks also continue to benefit from governance reform
- Tariffs and trade wars are still a near-term pressure point
- Inflation and the yen could yet influence Bank of Japan policy
- Valuations not stretched by historical standards, unlike in the USA
“Japan’s Nikkei 225 index is bearing down on the 50,000 mark for the first time, as investors look to new Prime Minister Sanae Takaichi and new Finance Minister Satsuki Katayama for a continuation of the stimulative fiscal and monetary policies that made Abenomics such a stock market hit,” says AJ Bell investment director Russ Mould.
"Takaichi inherits a run of five straight quarters of GDP growth and her preference for expansive fiscal policy and keeping interest rates low is well known, while Japanese stocks may also continue to draw a tailwind from ongoing corporate governance reforms.
Source: LSEG Refinitiv data
“In this respect, Takaichi is starting from a position of relative strength, even if her Liberal Democratic Party is relying upon the support of the Japan Innovation Party, rather than the traditional coalition partner, the Komeito, and the Bank of Japan faces calls for higher interest rates from both bond market vigilantes and US Treasury Secretary Scott Bessent, who continues to assert that the central bank and its governor, Kazuo Ueda, are behind the curve.
“The next meeting of the BoJ on 30 October will therefore attract even more interest than usual as the monetary authority looks to gradually tighten policy by raising interest rates and also shrinking its balance sheet by selectively selling Japanese Government Bonds and its holdings of Japanese equity exchange-traded funds (ETFs), albeit at a very modest pace.
Source: FRED - St. Louis Federal Reserve database, Bank of Japan, LSEG Refinitiv data
“Governor Kazuo Ueda seems cautious by nature and both rate increases, and balance sheet shrinkage are proceeding slowly, even if inflation remains well above the BoJ’s 2% target. A further reason for this measured approach is the uncertainty that results from President Trump’s tariff policies where lengthy negotiations between Washington and Tokyo resulted in the American imposition of a 15% levy on imported Japanese goods in September. That was a lower figure than initially planned, but the White House only made that concession on the basis that Japan in return invested $550 billion in the USA, and permitted the US to keep some of the profits from those assets.
“Japanese GDP growth has held up well despite the trade and tariff chaos, helped by a weak yen that gives exporters a welcome edge, but that currency slide also leaves the Bank of Japan on alert with regard to inflation. In this respect, the new team of Takaichi and Katayama may find themselves having to work to appease bond market vigilantes, just as their equivalents in the UK, France and even the USA try to strike the same balance between appeasing voters on one hand and financial markets on the other.
“The yield on 10- and 30-year Japanese Government Bonds (JGBs) stands at historically high levels to reflect worries over inflation, and also how Japan’s terrible demographics could make it more difficult for Tokyo’s government to meet its welfare bills and manage its existing sovereign debts and associated interest costs, especially, in the latter case, as interest rates rise.
“Inflation is a pressure point with the public, too. Even if the rice price squeeze should start to become less of an issue, overall price increases mean real wage growth is weak and issues such as housing affordability and immigration are also simmering in the background, once more just as they are in other G7 nations.
“Takaichi and Katayama thus have a busy in-tray as they begin work at the head of Japan’s 103rd cabinet. In some cases staying in power for even a year would be an achievement of some kind, given how many Japanese leaders have come to grief after only a short stay in office, including Takaichi’s predecessor, Shigeru Ishiba.
“A term of barely three-and-a-half years would be enough to take Takaichi into the list of the ten longest serving modern-day leaders in Japan.
Source: Japan kantei website. *Dates span all periods in office which may not have been consecutive
“Shinzo Abe’s two stints in office, across four cabinets, left him as the longest-serving Japanese prime minister, and investors warmed to the Abenomics reform programme, even if his stances on increased defence spending and the relaunch of nuclear power were not universally popular.
“Takaichi seems set to take a similar policy approach to national and energy security, and also on policy support for the economy, which may explain why stock market investors are welcoming her appointment, given the influence of Abenomics upon historic returns from the Japanese market and the benchmark Nikkei 225 index.
Source: Japan kantei website. *Capital gain, local currency terms. **LDP = Liberal Democratic Party. DPJ = Democratic Party of Japan. JSP = Japan Socialist Party. JRP = Japan Renewal Party. JNP = Japan New Party.
“Even after its galloping run in 2025, the Nikkei is not unduly expensive relative to its history, unlike the USA, even if it is no longer as cheap as it was. Forward earnings multiples for 2025 and 2026 sit around 17 and 15 times respectively, according to consensus analysts’ estimates, which also put the index on a forward dividend yield of 2.3% this year and 2.5% next. Perhaps the most telling valuation metric remains price to book value, where the Japanese market currently stands on a multiple of some 1.6 times, compared to the 2.4 times peak reached in the late 1980s and the early 2000s trough of just 0.8 times.”
