Japanese stocks are likely to keep rising under new Prime Minister Sanae Takaichi even if the yen strengthens as market’s momentum is now driven by broader sector strength rather than just currency weakness.
Takaichi’s surprise victory Liberal Democratic Party leadership election sent the yen lower and the Nikkei higher as investors bet on continuity with the pro-growth “Abenomics” policies of loose monetary settings, fiscal support and structural reform.
“Takaichi is widely seen as an equity market-friendly champion of the policies of the late Japanese Prime Minister Shinzo Abe,” said analyst.
“Abenomics” three ‘arrows’ are loose monetary policy, fiscal stimulus, and structural reform.
But analysts at Capital Economics say Japan’s market has already shown it can outperform without further yen depreciation.
Since early April, when U.S. tariffs on imports were paused, the yen has been broadly stable against the dollar, yet Japan has still outperformed all other major countries in MSCI’s World Index in local-currency terms.
That performance has been supported by technology, communication services, industrials and financial stocks. Industrials have benefited from a still-competitive currency, improving domestic growth and a trade deal with the United States, while financials have gained from higher Japanese government bond yields as the Bank of Japan slowly tightens policy.
Capital Economics expects the BOJ to raise rates more than markets anticipate over the next two years, which could strengthen the yen.
Though that should not derail the equity rally as big tech firms, industrial exporters and financials are likely to remain resilient, and the central bank’s gradual exit from equity purchases is unlikely to weigh heavily on sentiment.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads. “The outlook there remains bright for industrials as the economy recovers, and for financials as tighter BoJ policy exerts a bit more upward pressure on JGB yields,” the note said.
