Japanese stocks heading toward a "prolonged bull market"? Citi: Nikkei 50,000 is just a midway point

The Japanese stock market is showing strong momentum toward a long-term bull run. Driven by steady global markets and optimistic expectations for new government economic policies, gains have been notable over the past month. Citigroup (Citi) boldly predicts in a newly published strategy report that the Nikkei 225 reaching 50,000 points will merely be a "midway stop" on the bull market’s journey, and the long-term uptrend for Japanese stocks is far from over.

According to Wind Trader, Citi’s report published by analyst Ryota Sakagami and others on October 30 set a year-end 2026 target for the Nikkei 225 at 55,000 points. This bullish outlook is mainly based on three pillars: the new government is expected to smoothly implement supportive economic policies, corporate fundamentals remain strong amid inflation, and Japanese stocks’ low valuations have long-term room for correction.

The report points out that the new Prime Minister Sanae Takaichi’s government is expected to launch measures including tax cuts to support household budgets, and boost productivity by encouraging investment in growth sectors—potentially creating a stable “wage-price” virtuous cycle. If these policies are steadily pursued, they could become key catalysts for the Japanese economy and stock market.

Although Citi admits that in the short term, the TOPIX index’s 12-month forward price-to-earnings ratio (P/E) has approached historic highs, and rallying global tech stocks that have supported Japanese equities show signs of waning, the report stresses that a repeat of last August’s steep correction is unlikely. Analysts believe any short-term market corrections should be seen as “buy-the-dip opportunities.”

New Policy Dividend? Takaichi Government as Market Catalyst

Citi’s report believes that the formation of the new government and its policy agenda are key drivers behind the long-term bull market in Japanese stocks. The report notes that Liberal Democratic Party president Sanae Takaichi was elected Japan’s 104th Prime Minister on October 21. Although the ruling coalition (LDP and Japan Innovation Party, JIP) do not hold a majority in either chamber of Parliament, many of Takaichi’s policies align with opposition parties, making obstruction unlikely and paving the way for relatively smooth policy implementation.

According to the ruling coalition’s agreement, the new government’s policy framework aims to support households whose real incomes keep declining using measures like tax cuts; raise productivity by promoting investment in growth sectors; and thereby realize a virtuous cycle of wages and prices. Citi’s analysis states that if these policies are steadily implemented, they have massive potential to boost Japan’s economy and stock market. The report compares this to the periods following Junichiro Koizumi’s rise in 2001 and Shinzo Abe’s in 2012, arguing that stable political foundations and policies supported by the public could be driving forces behind the long-term rise in Japanese stocks.

Resilient Earnings Amid Inflation

In terms of fundamentals, Citi believes Japanese companies are showing strong earning power amid persistent inflation. According to the report, since 2023, the proportion of companies reporting quarterly earnings beats (“earnings surprise rate”) has consistently exceeded 50%, and business sentiment is on the rise.

This trend is especially marked in non-manufacturing sectors, particularly those driven by domestic demand. Data shows that even with stagnant output growth, inflation is driving up revenue for non-manufacturing industries. More importantly, the transmission of price increases is helping companies improve profit margins. Citi expects that if new government measures such as tax cuts successfully boost real household income, it will further consolidate inflation expectations, ensuring sustained strong earnings for companies primarily focused on domestic demand.

Valuation Recovery Still Has Room, Foreign Inflows Have Potential

Even though in the short term, Japanese stocks’ valuation relative to global markets may appear overheated, Citi believes that in the longer run, their valuation range still has considerable upside. The report analyzes that Japanese companies’ average ROE (Return on Equity) is rising, thanks to improved profit margins amid inflation and increased share buybacks driven by corporate governance reforms.

Citi believes that as ROE continues to climb, valuation benchmarks like Price-to-Book Ratio (PBR) and Price-to-Earnings Ratio (PER) may gradually shift higher. The report points out that since 2010, the TOPIX’s PER median has been around 14 times, but could reach 16 times or higher in future. Moreover, foreign capital inflows into Japanese stocks remain “quite ample.” According to statistics, in 2025 so far, net purchases of Japanese spot equities by overseas investors have reached 5 trillion yen, but given the net selling trend since 2014 and global monetary supply growth during that period, there remains substantial foreign capital waiting to flow in. Thus, the report concludes: “In the coming year or so, 50,000 points will merely be a checkpoint for the Nikkei 225.”

Short-term Risks Controllable, Corrections as Buying Opportunity

Citi also points out the short-term uncertainties facing the market, including TOPIX approaching peak forward P/E ratios, possible softening in global tech stock rallies, and abnormal yen weakness against the dollar.

However, the report believes that even if there is short-term yen strength and stock market weakness, a repeat of the sharp correction from last August is unlikely. The rationale: First, unlike the first half of 2024, recent Japanese stock gains are no longer entirely dependent on yen weakening; second, current US-Japan economic surprise indices are near highs, so fears of economic deterioration are unlikely to intensify; and finally, current stock returns and earnings forecast revisions are within reasonable bounds, without the fundamental disconnect seen last year. Based on this, Citi advises investors to see any market correction driven by short-term factors as buying opportunities. Strategically, the report recommends paying attention to consumer-related stocks that could benefit from household support policies, as well as the real estate sector, which has long-term potential amid entrenched inflation.

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