Podcast Summary: "Why Japanese Stocks Could Keep Rallying"

Podcast: Exchanges
Host: Alison Nathan, Goldman Sachs
Guest: Bruce Kirk, Chief Japan Equity Strategist, Goldman Sachs Research
Date: February 24, 2026
Duration: ~17 minutes

Episode Overview

This episode explores the remarkable rally in Japanese stocks following a strong 2025, with a particular focus on the political and structural catalysts pushing the market higher in early 2026. Following Prime Minister Sanae Takeichi’s landslide electoral victory, Bruce Kirk discusses what this means for the market outlook, policy change, investor sentiment, and the risks and opportunities that could shape Japan’s equities trajectory going forward.

Key Discussion Points & Insights

1. Election Results and Market Impact

[00:41–02:50]

• Consequential Victory: Takeichi’s decisive win delivers not just political stability but also confidence for markets.
• Historical Market Response:
  • Past LDP (Liberal Democratic Party) supermajorities (2005, 2012, 2014) led to swift and strong rallies—on average, markets rose ~20% in the three months following elections.
  • This is typically followed by a multi-month expansion in market valuation multiples, peaking about 3 points higher, then moderating.
• Drivers Behind Expansion:
  • "A large electoral mandate suggests that the winning Prime Minister should remain in power longer than the average." — Bruce Kirk [01:48]
  • Average PM tenure since WWII is just 1.5 years, making stability particularly valuable.
  • Lower political risk premium and more foreign investment help lift multiples.

2. Policies vs. Perceptions

[02:50–03:57]

• Both actual policy change and shifting global investor perceptions are fueling the rally.
• Upcoming Clarity:
  • Expect more direction soon, especially in defense and economic security.
  • Key upcoming event: "We’ve got a summit coming up in March 19 between Prime Minister Takechi and President Trump in Washington." — Bruce Kirk [03:23]
• Growing optimism surrounds potential advances in structural and corporate governance reforms.
• Foreign investors’ expectations for positive change are rising.

3. Fiscal Policy Concerns

[03:57–06:01]

• Consumption Tax Dynamics:
  • Takeichi pledged to temporarily cut the consumption tax on food for two years.
  • Initially, investors worried such a cut would be hard to reverse, especially ahead of the 2028 upper house election.
• Post-Election Relief:
  • Scale of Takeichi’s victory may actually decrease risk of aggressive or populist measures.
  • "The reaction in the FX market and the rates market is telling you that people are feeling a little bit more relaxed about the fiscal outlook than they were before the election." — Bruce Kirk [05:41]

4. Corporate Governance Reform Momentum

[06:01–07:33]

• "Corporate governance reform really came back into focus again in early 2023... The market reaction that we've seen since then has been extremely positive." — Bruce Kirk [06:26]
• Record highs in TOPIX and Nikkei, with total shareholder returns jumping from 6–7T yen pre-Abenomics to 40–45T yen/year now.
• Key foreign investor concern: pace of reform is still not fast enough; ROE (Return on Equity) has been flat despite market gains.

5. Where Are We in the Market Cycle?

[07:35–10:30]

• Kirk sees Japan still "very much in the upward phase of the current market cycle," which began in autumn 2022.
• Market has more than doubled since then, but sustaining momentum will require Japanese corporates and regulators to deliver tangible change, particularly in ROE improvement.
  • "If we want to see Japan go through a sustainable valuation rerating, then investors will want to see tangible improvements at that sort of index level ROE." — Bruce Kirk [09:29]
• How to Achieve Next-Level Gains:
  • Aggressive shareholder returns
  • Investment in growth and sector consolidation via M&A
  • Streamlined business restructuring
• Foreign/domestic investor alignment (top-down & bottom-up engagement) is key for the next stage.

6. Room for More Foreign Investment

[10:30–12:34]

• Foreign flow into Japanese equities re-started in autumn 2022 but faced a setback with a 24% correction in summer 2024.
• Foreign positioning has only just rebounded to late 2012 (Abenomics launch) levels.
• "Mutual funds are underweight Japan, not as underweight as they were in April last year, but still underweight." — Bruce Kirk [11:46]
• Significant increase in foreign buying before and after the election; positioning is improving but not overstretched.

7. Key Risks to the Rally

[12:34–15:21]

• Prime Minister as Market Catalyst/Risk:
  • A strong electoral win ties the market more closely to the sitting PM’s fate. Past sudden resignations have ended rallies (e.g., Koizumi in 2006).
  • "Barring either a health issue or a political scandal...Prime Minister Takechi should be around for a while, which I would take as positive." — Bruce Kirk [13:41]
• Policy risk (unsettling bond/FX markets), unresolved tax issues, and external shocks (global/geopolitical) all potential headwinds.
• Market Correction Risk:
  • Historically, market corrects >5% peak to trough ~three times/year; past year has been unusually steady, which in itself is a concern.

8. Outperformance and Foreign Flows

[15:21–16:47]

• Year-to-date, "Japan is significantly outperforming the US in dollar terms now...plus 14% year-to-date for TOPIX versus year-to-date flat for the S&P. And I think Nasdaq is now down 2% for the year." — Bruce Kirk [15:35]
• When Japan outperforms the US in dollar terms, it tends to attract additional foreign flows, boosting prices and valuations further.
• Growing US-based interest in Japanese stocks is evident at Goldman Sachs’ Tokyo conferences.

Notable Quotes & Memorable Moments

• On Mandate and Multiples:
  "A large electoral mandate suggests that the winning Prime Minister should remain in power longer than the average..." — Bruce Kirk [01:48]
• On Policy Relief:
  "The reaction in the FX market and the rates market is telling you that people are feeling a little bit more relaxed about the fiscal outlook than they were before the election." — Bruce Kirk [05:41]
• On Governance Progress:
  "Total shareholder returns...running at between 40 and 45 trillion per annum...But ROE is flatlining and that is definitely a concern." — Bruce Kirk [06:44]
• On Continued Rally:
  "We still believe we’re in the upward phase of the cycle... If we can see buy in from market participants and if everybody’s aligned in the same direction, that’s what’s going to be required to push the market into the next stage." — Bruce Kirk [09:39]
• On Foreign Flows:
  "Mutual funds are underweight Japan...We just got the data yesterday...about 1.8 trillion of net buying by foreigners the week before the election, and that was the second highest on record." — Bruce Kirk [11:20]
• On Correction Risks:
  "In almost a year we haven’t seen any sell off drastic enough to push foreigners out of the market again. So that’s a very unusual situation which in turn sort of makes it quite concerning." — Bruce Kirk [15:13]
• On Global Flows:
  "When Japan outperforms the US on a dollar adjusted basis, that tends to bring more foreign flows back into the Japanese market." — Bruce Kirk [15:39]

Timestamps for Key Segments

• [00:41] – Significance of the election results for Japanese equities
• [01:48] – Historical performance after LDP supermajorities
• [03:06] – Policy clarity & upcoming summit
• [04:09] – Fiscal policy: consumption tax debate and market relief
• [06:26] – Corporate governance reform—progress & concerns
• [07:50] – Market cycle stage, what’s next for Japan
• [10:42] – Foreign investor flows and allocations
• [12:44] – Risks: political, policy, correction, external
• [15:31] – Year-to-date outperformance and implications
• [16:47] – Closing remarks

Conclusion

This episode offers nuanced optimism on the trajectory of Japanese equities. Political stability, improving governance, and renewed foreign interest have created tailwinds, but true sustainability will depend on ongoing reform, ROE improvement, and avoiding complacency amid risks. Listeners get a clear, data-driven look at why Japanese stocks have room to run—but also a detailed map of what could go wrong, straight from Goldman Sachs’ top strategist in Tokyo.