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- [00:06]
A
After a very strong 2025, Japanese stocks have built on those gains in 2026. The most recent catalyst has been the outcome of the snap election. Prime Minister Sanae Takechi's resounding victory could pave the way for pro growth policies and might shift global investor perceptions about the Japanese market. I'm Alison Nathan and this is Goldman Sachs Exchanges. Today I'm joined by Bruce Kirk, our chief Japan Equity strategist in Goldman Sachs research. He joins us remotely from Tokyo. Bruce, welcome back to exchanges.
- [00:40]
B
Hi Alison, thanks for having me on the show.
- [00:42]
A
So let's just start with the recent news, Bruce. The election of course is the news of the day. You actually raised your target on Japanese equities on the back of Takeichi's victory. So how consequential really are these results?
- [00:55]
B
Our view is that this election result is extremely consequential, both from a political stability point of view within Japan and as a positive for the overall Japanese equities market itself. Now both of these factors we think are interlinked. And if you look at the performance following previous election results which have been politically significant, you do seem to see that. So what we observe when we look at the three previous elections historically where an LDP led coalition has achieved a 2/3 super majority in the lower house and that would be 2005, 2012 and 2014, what you tend to see is there's an initial positive market reaction and the market tends to go up about 20% on average in the first three months after the election itself. But then over that next nine month period, what we see is there's an expansion of the topics multiple and that peaks about three points higher from where we tend to be at the start of the election result. And then it sort of settles down a bit down to about a 2 point multiple premium. What drives that multiple expansion? We think you can attribute it to a couple of points also interlinked. I think the first would be a large electoral mandate suggests that the winning Prime Minister should remain in power longer than the average. And the average tenure of our Japanese Prime Minister Since World War II is about a year and a half. So that would suggest more political stability, more policy continuity and that should in turn sort of lower the risk premium of the market itself. And then that type of more favorable environment tends to pull in more foreign investors who also help push the multiple higher. So that's what we saw in 2005 and that's what we definitely saw in 2012.
- [02:51]
A
But when we think about the market's reaction to this relatively historic election. Is it really more about expectation of changing policies from this new prime minister or is it really just investor perceptions shifting? Given some of the points you just
- [03:07]
B
made, we think it's a combination of both. I think Ms. Takeichi's policy agenda should become clearer over time. But I think you will see in the near term, I think you're going to see more clarity around areas like defence, economic security and the relationship between Japan and the U.S. alison, as you know, we've got a summit coming up in March 19 between Prime Minister Takechi and President Trump in Washington. So I think there should be a lot more clarity around that. And then I think from an investor perception point of view, it will really be around how much positive change investors think Prime Minister Takechi can encourage around areas like structural reform and corporate governance reform. I think those will be key. But when we speak to investors, I think those expectations are definitely rising at the moment.
- [03:58]
A
Correct me if I'm wrong, Bruce. It seems like a lot of focus has been placed on a potential shift in fiscal policies with the election of Takeichi. Talk us through some of the implications of that.
- [04:09]
B
I mean, I think going into the election itself there were a number of concerns around fiscal sustainability. One of the areas that I think investors both in the FX market and the rates market were focused on was an election pledged by Ms. Takeichi to bring down the consumption tax on food for a two year period and then to raise it again afterwards. And the logic behind that was that it would help alleviate the cost of living crisis for Japanese households. I think the concern that both investors in the rates market and the FX market had was, you know, I think it's easy to bring down taxes and then it becomes a lot more difficult to raise them again at some point in the future and two years from now that would put us at the upper house election in 2028 and it could be politically difficult to do that for the Prime Minister. So I think that's where the concerns are around fiscal policy. I think sort of almost counterintuitively the scale of the victory that Prime Minister Takechi had at the lower house election, it probably lowers the probability of her doing something more drastic and more sort of populist that could lead to fiscal issues. If she knows that she doesn't really have to face the electorate again for another four years in the lower house and that the main centre left opposition is really, they were completely annihilated in the last election. Maybe she now feels politically secure enough not to do anything more drastic. So I can understand why those concerns were there before the election. But I think if you look at the reaction in the FX market and the rates market, it's telling you that people are feeling a little bit more relaxed about the fiscal outlook than they were before the election.
- [06:02]
A
Interesting. But going back to that point on corporate governance reform that you made, Bruce, and some of the positive momentum that could bring to the market. Correct me if I'm wrong, but it has been a multi year journey to bring about corporate governance reform in Japan. So talk to us a little bit about how successful that journey really has been and why investors should be optimistic about it ahead.
- [06:26]
B
Corporate governance reform really came back into focus again in early 2023. So almost exactly three years ago now. The market reaction that we've seen since then has been extremely positive. We now have topics in Nikkei frequently testing all time highs. Over the last couple of months, total shareholder returns have definitely improved significantly. So before Abenomics, total shareholder returns for the Japanese market were running about 6,7 trillion yen per annum. They're now running at between 40 and 45 trillion per annum. And that on a standalone basis is obviously very positive. However, one concern that we do hear from foreign investors repeatedly is that while the direction of travel is correct in the Japanese equities market, they would like to see a greater sense of urgency when it comes to corporate governance reform. And the fact that ROE is flatlining is definitely a concern.
- [07:25]
A
But now post this election there is more optimism that you're going to see more momentum in that direction or more movement in that direction?
- [07:34]
B
Definitely. Definitely, yes.
- [07:35]
A
And Bruce, as you said though, we've already seen some very substantial gains in the equity market. If you think about the changes ahead and your expectations, do you think we've seen the bulk of the move already behind us, or do you think there's a lot more Runway here to the upside?
- [07:50]
B
We take a sort of market cycle approach to the Japanese equities market and we definitely borrow heavily from our colleague Peter Oppenheimer in that regard. But I think where we are currently, we believe that we're still very much in the upward phase of the current market cycle. And we think that market cycle started in the autumn of 2022 and since then topics has more than doubled. But we think we should see more upside in the next phase. But it will be more challenging because we are entering the delivery phase of the cycle where the government and corporate Japan really need to deliver on the expectations of change that have been building over this initial three, three and a half year period. I think Investors, especially foreign investors, I think will need to see proof that corporate Japan is really changing. And there are some very positive signs that that is taking place. But they will need to see organizations like the Tokyo Stock Exchange, like the Ministry of Economy, Trade and Industry, METI and like the regulator, the fsa, they would like to see them continue to provide top down pressure on corporates to keep them doing the right thing at an accelerating pace. And I think that's the important thing for this rally, that we need to see the momentum continuing to accelerate from here. And if that top down pressure can align with what investors, both foreign and domestic, are trying to do from a bottom up perspective in terms of engaging with management, then I think we could see a really interesting dynamic moving forward. But as I said previously, I think the key to the next phase will be ROE improvement. The market has definitely gone higher over the last three years, but Roe has effectively flatlined around 9, 10%. 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 and I think if you ask how could that be achieved, I think it's a combination of more drastic, more aggressive shareholder returns. I think it's about investment in growth, I think it's about sector consolidation through M and A. Japan has essentially too many listed companies that are below scale and then more drastic business restructuring. So I think if we can see buy in from market participants and if everybody's aligned in the same direction, then I think that's what's going to be required to push the market into the next stage.
- [10:30]
A
It does seem like there's been a fairly bullish narrative around Japanese equities and obviously as we've been discussing, they have performed well. How much further do you think there is? How much room is there for international investors to increase allocations to Japan?
- [10:43]
B
If we look at net foreign positioning or net foreign buying or selling by foreigners of the Japanese market over the last two, three years. When the market bottomed in the autumn of 2022, we did start to see foreign investors reposition into the Japanese equities market. And that is a regular feature of the early start of a market cycle. However, as you remember Alison, we had this 24% peak to trough correction in topics in the summer of 2024 and that really scared out a lot of investors. The foreigners sold about 13 trillion yen of Japanese equities, cash and futures following that bank of Japan sell off in the summer of 2024. Net positioning it only bottomed April Last year after Liberation Day, and we're pretty much we've got back to those July 24th peak levels again. But when we take a longer term view and you look at where foreigners were positioned at the start of Abenomics back in late 20, 2012, we're essentially just about at that same level. And when we look at mutual fund data, it still suggests that mutual funds are underweight. Japan, not as underweight as they were in April last year, but still underweight. So we just got the data yesterday. Actually we saw about 1.8 trillion of net buying by foreigners the week before the election and that was the second highest on record. And that would take us to about 3.4 trillion year to date, which is not far off the full year total that we had for 2025. So I think the foreign positioning in Japan, it's improving, but it's still not at levels that you could call stretched.
- [12:34]
A
Interesting. Okay, so maybe a bit more room to run. If you think about everything we've discussed, Bruce, what is the biggest risk to these positive views for Japanese equities?
- [12:44]
B
I think one of the side effects of a convincing electoral victory like the one we saw from Prime Minister Takechi a couple of weeks ago. I remember that this is the first time in the LDP's history that they won a standalone supermajority. So it's consequential or it's monumental in that regard. But I think one of the side effects is that the Prime Minister, the winning Prime Minister, ends up being inextricably linked with the policies of that administration. So if we see the Prime Minister subsequently resign unexpectedly, that can mark the end of the rally or the end of the upward phase of the cycle. And, and we have seen that historically. So that was definitely the case in 2005 when Prime Minister Koizumi resigned suddenly towards the end of 2006. And that pretty much marked the peak of the market. But given the scale of Mr. Takechi's victory, and barring either a health issue or a political scandal that we're not currently aware of, then I think it feels at this stage that Prime Minister Takechi should be around for a while, which I would take as positive. Other things to worry about, other risks. I think policy risk is something that we do need to keep an eye on. If our administration does something that unsettles the bond market or the FX market, that could eventually flow into risk sentiment around the equities market itself. There is still the focus on this consumption tax, proposed cut to consumption tax. So we need to see how that plays out. And then if we look at it through a broader lens, there is that ever present external risk of either something happening with the US economy or a geopolitical event or some sort of global growth shock. But that obviously is not something which is in the firm's base case outlook for 2026 at the moment. One additional point I would like to make is that when we look back at the Japanese equity market, the volatility of the market over the last four or five years, what you do tend to see is around three times a year you have a market Correction Greater than 5% peak to trough. Now the last one we had was immediately after Liberation Day last April, so almost a year ago. So since Liberation Day the market has just really grown steadily higher since then. And you know, 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.
- [15:22]
A
So beware of correction risk, but the political backdrop as well as the macro and economic backdrop generally suggests higher from here in terms of Japanese equities.
- [15:31]
B
Yeah, exactly. And one other point that I would make is, and this goes back to the point you were making about flows earlier. If you look at year to date performance, Japan is significantly outperforming the US in dollar terms now. So, so plus 14% year to date for topics versus year to date flat for the S and P. And I think Nasdaq is now down 2% for the year. When that happens, when Japan outperforms the US on a dollar adjusted basis, that tends to bring more foreign flows back into the Japanese market. And when that happens it tends to push the market higher and push the multiples higher, which is the assumption we're making in our target price. So if you think about the geographic diversification trade out of the US that Peter Oppenheimer has been focused on for a while now, it feels like that is playing out in Japan at the moment. And we had our investor conference in Tokyo in December last year and one of the noticeable trends was the number of new US based investors and allocators that were coming through Tokyo and kicking the tires on the Japanese equities market. And so far this year that seems to continue to be a trend. So we're in a very interesting point when it comes to foreign flows as well.
- [16:47]
A
Thanks so much for joining us Bruce and sharing your insights.
- [16:51]
B
Thank you very much.
- [16:52]
A
Thank you for listening to this episode of Goldman Sachs Exchanges which was recorded on Thursday February 19, 2026. I'm Alison Nathan.
- [17:03]
C
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