Valerio Baselli: Hello and welcome to Morningstar. Japan has entered a new political era with the historic appointment of Sanae Takaichi as the country’s first female Prime Minister, marking a pivotal moment for both domestic policy and investor sentiment.
To explore the consequences on the Japanese market, today I’m joined by Louis Chua, Equity Research Analyst Asia at Julius Baer.
So, Louis, with the appointment of Takaichi, what are the most important policy shifts you expect in Japan that will impact Japanese equities?
Louis Chua: Thanks, Valerio. So, with the appointment of Sanae Takaichi as Japan’s first lady Prime Minister, I think this has brought about key questions about her economic policies, which is commonly known as “Sanaenomics”. And so, what “Sanaenomics” means is really, if you look at her policies, she will be implementing what she calls responsible and proactive fiscal policy. So essentially, fiscal stimulus to bring about greater economic growth in the Japanese economy. And these we believe, is essentially a very key ingredient in driving a very positive sentiment in the Japanese equity markets.
Baselli: Given that markets reacted positively at first but also showed some concerns about fiscal sustainability and the yen – which weakened after her election – do you believe the Japanese equity market’s valuation is now offering good entry points, or is there risk of over-extension?
Chua: It has been a very exciting journey over the last couple of weeks. From the point of her election as the leader of the Liberal Democrat Party at the beginning of October to her election in 21st of October. Now, the markets have been volatile but otherwise have been trending up with the Nikkei 225, you know, setting new record highs right now is about 51,000 at the point of our recording. And I do believe that if you think about the Japanese political landscape, it’s also important to bear in mind that the alliance or coalition between the LDP and its new coalition partner Ishin would actually have a moderating impact on the fiscal policies that Takaichi had wanted to implement. And so, while the market has been a little bit concerned on the sustainability of fiscal policies in Japan, I think having this coalition partner play a part, and would actually help to moderate some of these, overly aggressive fiscal policies.
Now, of course, at the same time, given that the markets have been surging, it will not be a surprise to see a consolidation at some point. But it’s important to keep in mind that we do not expect a correction per se, just a consolidation. And we take the opportunity to accumulate quality Japanese stocks. Also important to keep in mind that the Japanese equity markets, while relatively more expensive on an absolute valuation basis, relative to global markets, we do see there are still treating it closer to a 15-16% discount, which in our view is attractive.
Baselli: What do you see as the biggest tail‐risks under this new government?
Chua: I would say I would look both to the external environment than internally within Japan when it comes to tail risk. The biggest one in my view, of course, is the biggest debate right now to everyone in the markets is having: whether or not artificial intelligence or AI is actually in a bubble. I think this is the number one question that many investors have on their minds. Our house view right now is that we do not believe it to be so at this point in time, but still something to keep an eye on given that many of the Japanese leading companies are key manufacturers and supply chain partners of many of the largest AI companies and hyperscalers.
The other thing that I will keep in mind also is that when it comes to politics, you know, never say never. The situation with the whole political environment over the last two months has given us a glimpse of how dynamic this can be. And should there be any political uncertainty or legislative roadblocks to Takaichi’s policies, then that is definitely something to keep an eye on.
Baselli: Finally, when it comes to sectors, where do you see the biggest winners and losers emerging under the new administration? And what’s driving those dynamics?
Chua: Now, I think if you look at the fiscal stimulus backdrop as a whole, it’s supportive of the Japanese equity markets. But within that, actually if you look at the policies that she has articulated through her first speech in the Japanese Diet or the Japanese Parliament, then we see that economic security, national security, these are key themes that she has spoken about. And this is not solely when it comes to the traditional sense of increasing defense spending as a percentage of GDP. Shipbuilding. There are also various infrastructure projects that she will be pushing.
And so, these, along the same lines, we do see that when it comes to economic security, the likes of infrastructure stocks, artificial intelligence, the whole semiconductor supply chain, energy, nuclear, these are some of the different sectors that will be poised to benefit. And also we have seen recently with the recent conclusion of the meeting between US President Trump and Prime Minister Takaichi, then I think the domestic investment priorities also closely aligned with that of the partnership between Japan and the US across both the national security and economic security funds. So, these are some of the sectors that we will be keeping close eye on.
Baselli: Very interesting. Thank you so much for your time, Louis. For Morningstar, I’m Valerio Baselli, thanks for watching.
