Japan’s 100th prime minister

Fumio Kishida became the new leader of Japan’s ruling party, the LDP, on Wednesday, replacing Yoshihide Suga.

The former foreign minister was previously considered an heir to Prime Minister Shinzo Abe, but came in second in the LDP leadership vote last year, following Abe’s resignation. This time round, he successfully beat off Japan’s vaccination program leader Taro Kono and will likely be voted in as Japan’s 100th prime minister on Monday.

With the next general election expected on either 7 or 14 November, what does this mean for the Japanese stock market?

Are Japanese equities poised for a comeback?

The Japanese equity market has underperformed other developed markets this year, having fallen significantly between February and May. But since late August – and especially since Suga announced he would be stepping down – it has rallied. It is now back in the black, up almost 2% year to date*. And, generally speaking, Japan’s equity market has historically risen ahead of general elections.

Matthews Asia portfolio manager Shuntaro Takeuchi believes Japan is poised for a comeback, driven by earnings momentum. “From a structural point of view, we continue to believe the earnings capability of Japanese companies has improved meaningfully over the past economic cycle, driven by better corporate governance and a higher focus on capital efficiency,” he said. “We believe multi-year trends such as productivity growth and innovation in health care, technology and material science—where Japanese corporations historically excelled versus global peers—not only remain intact but will accelerate.”

T. Rowe Price Japanese Equity fund manager Archibald Ciganer says although the path to Japanese economic recovery is beset with uncertainty, he does believe that a broadening domestic and global economic recovery means Japan offers a compelling active management case, particularly as the market “continues to undergo governance reform and improvement and displays positive change dynamics”.

Fidelity says that Japan is also well-positioned for a period of higher inflation in the wake of record stimulus spending globally. “Japan stands to emerge as a net winner from shifting global economic conditions in the wake of the Covid-19 pandemic, with growth further invigorated by deep domestic reforms targeting structural challenges,” the company said.

“Japan Inc. stands to benefit from future price hikes, with a benchmark equity index tilted towards sectors that tend to outperform in periods of rising inflation, such as automakers, machinery companies and producers of consumer durables.

“The country’s cashed-up corporates are also well positioned to enter an era of rate hikes, as they have the lowest debt-servicing burden among major markets. Abundant cash would also allow Japanese firms to pay more attractive dividends or repurchase more shares than those in other developed countries.”

FundCalibre rates nine Japanese equity funds and trusts. Some portfolios have a bias towards smaller and medium-sized companies like AXA Framlington Japan and Comgest Growth Japan. Others, like FSSA Japan Focus, invest in larger companies, while Baillie Gifford Japanese Income Growth likes to target companies paying a growing dividend.

*Source: FE fundinfo, total returns in sterling for the Nikkei 225 from 30 December 2020 to 27 September 2021