Investment implications on Japanese financial assets after Takaichi victory in LDP election pointing to more expansionary policy outlook

Highlights: In the near term, we think asset prices should reflect the pro-stimulus policy stance. However, the overhang of government debt sustainability and the central bank monetary policy normalisation should remain in the longer term. We stay neutral on JPY and Japanese equities and underweight on JGBs in our global asset allocation.

• New party leader: Sanae Takaichi, the former Minister of State for Economic Security, was elected as the new leader of Japan’s ruling Liberal Democratic Party (LDP) on 4 October, setting the stage for her to become the first female Prime Minister as the head of a coalition government in a parliamentary vote expected in mid-October. Being a strong advocate of “Abenomics”-style expansionary policies, Takaichi has called for more fiscal and monetary stimulus to boost growth, including deficit-financing bonds issuance, tax cuts and government subsidies
• JPY (Neutral): The JPY had strengthened against the USD leading up to the LDP leadership election, before weakening to around 150 level to the USD in today’s morning trading session. Market concerns about fiscal sustainability could stay elevated if Japan’s fiscal policy become substantially more expansionary. This would add to near-term volatility for the JPY
• JGBs (Underweight): We expect near-term volatility of JGBs, especially in longer end of the curve, as markets may be concerned about higher issuance of government debt and fiscal sustainability risks under Takaichi’s expansionary policy agenda. Despite Takaichi’s expansionary policy agenda, we forecast BOJ will have a 25bp hike in October this year on the back of five consecutive quarters of economic expansion, the settlement of trade deal with the US and core-core CPI inflation running well above the 2 per cent target rate
• Japanese equities (Neutral): While investor’s sentiment will get some support from Takaichi’s pro-stimulus policy stance, we think the valuation of the Japan stock market is fair at 15.5x forward P/E. We favour domestic reflation plays in Japanese technology, financials, and consumer stocks, but cautious on exporters due to negative impact of US tariffs