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Goldman sees Japan’s rally extending on political stability and reform momentum — but sustainable gains hinge on ROE delivery.Summary:Takaichi’s landslide boosts political stabilityHistory suggests post-election multiple expansionGovernance reform key to next legROE improvement central to re-ratingFiscal concerns easing post-electionForeign positioning improving, not stretchedReform delivery now criticalJapanese equities could have further upside following Prime Minister Sanae Takaichi’s decisive snap election victory, according to Bruce Kirk, Chief Japan Equity Strategist at Goldman Sachs Research.Kirk argues the result is “extremely consequential” for both political stability and equity valuations. Historically, when an LDP-led coalition secures a two-thirds supermajority, markets have delivered an average 20% gain in the first three months, followed by further multiple expansion over the subsequent nine months. The key driver is reduced political risk: a strong mandate increases the likelihood of longer leadership tenure, policy continuity, and a lower equity risk premium — dynamics that typically attract foreign capital.Near term, investors will look for clarity on defence, economic security and US-Japan relations, particularly ahead of the upcoming Takaichi–Trump summit. But the more durable catalyst lies in structural reform and corporate governance. While governance reform regained momentum in 2023 and shareholder returns have surged to ¥40–45 trillion annually from ¥6–7 trillion pre-Abenomics, return on equity has stalled around 9–10%. For a sustainable valuation re-rating, Kirk says investors need tangible ROE improvement through stronger shareholder returns, growth investment, M&A consolidation and deeper restructuring.Fiscal policy remains a watchpoint. Concerns centred on a proposed temporary cut to the food consumption tax. However, the scale of Takaichi’s victory may actually reduce the risk of populist fiscal measures, easing pressure in FX and rates markets.Foreign positioning is improving but not stretched. Mutual funds remain underweight Japan, and renewed outperformance versus US equities could pull in further allocations.Risks include policy missteps that unsettle bonds or FX, unexpected leadership change, global shocks, and the absence of normal market corrections. Still, Goldman believes Japan remains in the upward phase of its cycle, with reform delivery now the critical next step.—This was interesting from Japan yesterday and has equity market implications:The Japanese Yen sinks as PM Takaichi signals opposition to further BoJ rate hikes
This article was written by Eamonn Sheridan at investinglive.com.
💡 DMK Insight
Japan’s political stability could fuel a rally in equities, but watch ROE closely. Goldman’s analysis highlights that the recent political developments, particularly Takaichi’s victory, are likely to enhance investor confidence. This could lead to a multiple expansion similar to past post-election trends. However, the real test will be whether companies can deliver on return on equity (ROE) improvements. Traders should monitor ROE metrics closely, as sustained gains in Japanese stocks will depend on this key performance indicator. If firms fail to show tangible improvements, the rally could stall. Additionally, easing fiscal concerns and improving foreign positioning suggest a favorable environment for Japanese equities. But remember, the market’s reaction can be volatile, especially if ROE disappoints. Keep an eye on key earnings reports and economic indicators that could impact ROE projections. The next few months will be crucial for determining if this rally has legs or if it’s just a short-term bounce.
📮 Takeaway
Watch for ROE improvements in Japanese equities; failure to deliver could halt the rally despite political stability.
