A couple of months ago, I had the pleasure of sitting down with Nicholas Weindling, manager of JPMorgan Japanese (JFJ) as part of our ‘meet the manager’ podcast series (you can listen here). Our chat proved to be very timely as just three months into the job, Sanae Takaichi, Japan’s new and first ever female prime minister, had called a snap general election in a bid to convert her strong public polling into a large majority in Japan’s lower house for her Liberal Democratic Party (LDP).
Japan went to the polls on Sunday 8 February and Takaichi’s gambit paid off spectacularly. The LDP, which had been flagging, won by a landslide – securing 316 of the 465 seats in the lower house, easily surpassing the 261 seats needed to achieve an overall majority and the largest majority achieved by any party in post-war Japan. In addition, the LDP’s junior coalition party, the Japan Innovation Party (referred to as Ishin, meaning renewal or restoration) won 36 seats, giving Takaichi’s coalition a supermajority.
Landslide gives freedom to implement legislative agenda
This supermajority is important as it allows Takaichi’s government to override the upper house in the National Diet, easing the passage of its legislative agenda. Takaichi’s government has a two-and-half-year runway to push on with its plans, as the next national elections – for the upper house – are not due until July 2028.
Japanese stocks hit record high on back “historic victory”
The Japanese market reacted positively to the election result – the benchmark Nikkei 225 Index briefly passed 57,000 to reach a record high, before settling slightly and closing 3.9% up on the day. What was the market reading into this result?
First, markets and businesses like certainty and Takaichi has secured a clear mandate for her pro-growth, pro-business policies. She is unashamedly right wing: as Nicholas explained in the podcast, Takaichi is known to be a big fan of Margaret Thatcher and is an acolyte of Shinzo Abe – who led the “three arrows” economic reforms back in 2012 – so a business-friendly environment is expected to prevail. Furthermore, the risk of leadership challenges or near-term policy paralysis is effectively removed, which is important as Japan’s fragmented politics have previously frustrated reform.
Second, the result is also seen as an endorsement of ongoing corporate governance and capital-allocation reforms that have been taking place in Japan. These have been a key driver in the re-rating of Japan’s equity market by encouraging buybacks, dividend growth and better balance-sheet discipline but are still seen as a long-term story that has further to run.
Third, there is scope for a more pragmatic approach towards Japan’s largest trading partner, China. Takaichi’s earlier remarks on potential Japanese intervention in the event of a Chinese move on Taiwan played well domestically but strained relations with Beijing, prompting boycotts of Japanese goods and tourism. With the election now behind her, the government has room to adopt a more conciliatory tone and seek a stabilisation of bilateral ties – a reset that Beijing is also likely to see as being in its own economic interests.
Finally, with a strong majority, Takaichi’s government can push forward with her plans to pursue an expansionary fiscal policy, often dubbed “Sanaenomics”. The aim is to revitalise the Japanese economy and address a number of key vulnerabilities – think economic self-sufficiency, food and energy security; accelerated defence build-up; cost-of-living relief; as well as social security and infrastructure. Part of her personal popularity – she enjoys an approval rating of over 70% and over 90% with some young people – is that she wants to help working people who are struggling with the cost-of-living crisis in Japan, for example by cutting VAT on food to zero.
The expectation is that these measures will lead to higher economic growth, but there are concerns about how they can be funded. However, this week saw Japan’s parliament approve the appointment of Toichiro Asada and Ayano Sato, who are seen as Takaichi’s dovish nominees, to join the Bank of Japan’s nine-member board. The BOJ’s Governor, Kazuo Ueda, has signalled that the bank is shifting away from a focus on downside risks that required a slow, cautious approach to “normalising” borrowing costs.
What does this mean for JFJ?
JFJ maintains a portfolio of quality growth stocks that is built with a long-term mindset and so, in the short term, the election result did not precipitate any short-term trading. However, the decisive victory plays into its long-term approach, reinforcing important shifts the portfolio has made in recent years.
Chief among these is a growing exposure to Japan’s defence and heavy-industry complex. Although Japan formally maintains only a self-defence force, defence spending – which sits around 1% of GDP historically – is being reassessed as Japan, like Europe, rethinks its reliance on the US for security and equipment. Since the election, Takaichi has engaged in high-level diplomacy with the US – including a trip to The White House – reinforcing Japan’s role as a key ally in the region, while trying to avoid getting drawn into deeper military engagements. However, with the supermajority in place, there is talk of constitutional reforms that could give greater freedom to enhance Japan’s defence capabilities.
This shift is creating structural opportunities for domestic suppliers. JFJ has been increasing exposure to large Japanese industrial groups positioned to benefit from higher defence spending, many of which were previously excluded due to weak governance and poor capital discipline. Today, these companies are undergoing meaningful operational and balance-sheet restructuring and, in some cases, offer some of the strongest medium-term growth prospects in the market. Crucially, the government appears willing to allow sustainable margins and, for the first time, greater scope for exports.
Portfolio company IHI illustrates this change well. Having exited lower-quality activities, the company is now focused on defence and aircraft engines, resulting in a more concentrated, higher-margin business with improved free-cash-flow generation – exactly the type of transformation the JFJ team seeks to back.
Elsewhere, political stability reinforces continuity across other long-term themes in the portfolio. Japan’s globally scalable intellectual property remains a key differentiator, with companies such as Nintendo and brands like Uniqlo benefiting from long overseas growth runways. Rising interest rates are also reshaping opportunities in areas previously avoided, notably banks, where improving profitability and balance-sheet rationalisation are unlocking capital returns.
Overall, the election result strengthens the backdrop against which JFJ’s strategy operates. With greater political clarity, the structural growth opportunities the managers have been positioning for – across defence, global brands and financials – have more room to play out.
In the short term, however, as has often been the case recently, the actions of the White House have distorted the picture. The BoJ’s job has been made more difficult as crude oil prices and energy costs have jumped on the back of the US and Israel’s war with Iran; most of Japan’s oil imports come from the Gulf region. Unsurprisingly, this is putting downward pressure on Japanese equity prices. Markets have recently been showing signs of recovery as talk from the White House turns towards the cessation of hostilities, but it is too soon to say whether this is the beginning of the end. Better news in the Middle East could see a sharp recovery in the market.
