Japanese stocks have responded positively to news that its new prime minister, Sanae Takaichi, has won a landslide victory in the country’s snap election on 8 February.
Takaichi called the election soon after she took over as leader of the Liberal Democrat Party (LDP) in the hope of winning a sizeable majority to push through her economic agenda, which is likely to include more government spending in a bid to revitalise the country’s economy.
Calling the snap election was viewed as a gamble, especially given Takaichi’s indications that she would step down as prime minister if she failed to win a big majority. But the move appears to have paid off, with the LDP securing 316 out of 465 seats in Japan’s House of Representatives – the first time a single party has secured a two-thirds majority in the history of Japan’s present parliamentary structure.
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Combined with its coalition partner, the Japan Innovation Party, the LDP secured 352 of 465 seats.
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The win saw Japanese stocks rise, with the Nikkei 225 gaining 3.9% on Monday 9 February.
“The big story of the week is a remarkable landslide victory for Japan’s first ever female prime minister, Sanae Takaichi, and the ruling LDP party she heads,” said Tom Stevenson, investment director at Fidelity International.
“Takaichi was hopeful of a big win. But the scale of the landslide on Sunday surpassed everyone’s expectations, leaving Japan as a beacon of political stability,” Stevenson added.
What does Takaichi’s big win mean for Japanese stocks?
Takaichi, Japan’s first female prime minister, now has a mandate to put forward what is expected to be a robust pro-growth agenda for the Japanese economy.
“This includes expansionary fiscal spending and increased strategic investments in areas such as semiconductors, artificial intelligence (AI), energy security, defence and shipbuilding,” said Hisashi Arakawa, Head of Japan Equities at Aberdeen Investments. “There is also talk around suspending the 8% consumption tax, which would also help lift domestic consumption.”
“Industrial stocks were big winners, on hopes that strategic spending plans will boost key sectors,” said Stevenson.
Takaichi’s pro-growth program will coincide with a longer-running development in Japan’s stock market, namely attempts by the country’s Financial Services Agency to continue to improve corporate governance in the country.
This will see Japanese companies, which historically have tended to sit on large quantities of cash, become incentivised to return this capital to investors through reinvestment, dividends and share buybacks.
“We believe that the outlook for quality remains positive, with the market increasingly rewarding companies that can deliver sustainable earnings and adapt nimbly to a shifting operating backdrop,” said Arakawa.
What are the risks in Takaichi’s agenda?
While her gamble of a snap election has paid off, Takaichi’s move is not without risk as far as Japan’s economy is concerned.
The country has among the highest levels of government debt in developed markets, and fears that Takaichi’s economic program will add to that, especially given her new mandate, have seen Japanese government bond yields rise.
“Companies are wary of higher government borrowing and potential tax changes,” said Kate Marshall, lead investment analyst at Hargreaves Lansdown. “There are also concerns about labour shortages. Japan’s population is ageing rapidly and Takaichi has taken a tougher tone on immigration.”
In the last three months (roughly corresponding to Takaichi’s tenure as prime minister), yields on 10-year Japanese government bonds have increased from around 1.7% to over 2.2%, reaching as high as 2.3% on 9 February.
“Investors are watching developments closely, not just for the impact on Japanese assets, but potentially on other markets too,” said Stevenson. “Rising yields on Japanese government bonds make Treasuries [US government bonds] less relatively attractive and could trigger a repatriation of assets from the US to Japan. Higher Treasury yields, in turn, could have a negative impact on US shares, especially growth stocks whose present day value is reduced as bond yields rise.”
How to invest in Japanese stocks
Depending on the broker, some UK-based investors may be able to buy Japanese stocks directly. But most will prefer to invest via a fund or investment trust that focuses on the country.
For broad-based exposure to the Japanese stock market, investors could select a tracker fund like the Vanguard FTSE Japan UCITS ETF (LON:VJPN) or the iShares Nikkei 225 UCITS ETF (LON:CNKY). These track the FTSE Japan index (which is comprised of large- and mid-sized Japanese stocks) and the Nikkei 225 index (which consists of 225 of Japan’s largest and most-traded stocks) respectively.
The two largest investment trusts that focus on the Japan market (as of 9 February) are Baillie Gifford Japan Trust (LON:BGFD) and JPMorgan Japanese Investment Trust (LON:JFJ).
