Wall Street sees Sanae Takaichi as "bullish" for Japanese stocks: bull market continues, valuations rise
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The appointment of Japan’s first female Prime Minister, Sanae Takaichi, is sparking a collective bullish outlook among Wall Street investment institutions. Both Morgan Stanley and Citi believe this historic political shift will drive an expansion of Japanese stock valuations and sustain the bull market trend.
According to CCTV News, on October 21 local time, in the second round of the Japanese House of Councillors’ prime ministerial selection, LDP president Sanae Takaichi won 125 votes, winning the vote and becoming Japan’s 104th Prime Minister, as well as the country’s first-ever female premier.
On October 23, according to Trading Desk News, Morgan Stanley indicated in its latest research report that Takaichi’s appointment symbolizes structural reform and leadership diversity, expected to drive Japanese stock market PE ratio expansion through three main channels: growth strategy expectations, the acceleration of corporate governance reform, and improvements in ESG ratings.
Citi emphasized in its latest report that the new government effectively has majority support in the Diet, so policies will be able to advance relatively smoothly. The bank maintains its previous forecasts: the TOPIX index will reach 3,400 at the end of December 2025 and 3,500 at the end of March 2026, while the Nikkei 225 will reach 51,000 and 52,500, respectively. Citi believes the 50,000 level is merely a “checkpoint” for the Nikkei 225, not the end.
Morgan Stanley: Three Major Paths to Drive Valuation Expansion
Morgan Stanley’s report detailed how the Takaichi administration will boost Japanese stock market valuations.
The bank believes that if the government implements its growth strategy and promotes corporate governance reform, corporate growth expectations will rise by 0.5 percentage points and capital costs fall 0.5 percentage points, which would roughly double the forecasted P/E ratios for the Nikkei and TOPIX.
On growth strategy, Morgan Stanley expects pro-growth measures proposed by the LDP and Japan Innovation Party to lift corporate earnings growth expectations and expand P/E multiples. Both parties are pushing market-friendly policies such as fiscal stimulus, tax cuts, deregulation, and innovation support.
The bank noted that if these policies raise Japanese companies’ long-term growth expectations by 0.5 percentage points, with capital costs unchanged, theoretical P/E ratios would increase by about 1x.
On corporate governance reform, Morgan Stanley specifically mentioned Takaichi’s discussion of a possible tax on retained earnings in her 2021 book “Toward a Beautiful, Strong, and Growing Nation.”
In the 2024 LDP presidential election, she again stressed revising the corporate governance code to require companies to disclose the use of retained earnings. This aligns with the Financial Services Agency and Tokyo Stock Exchange’s push for “management conscious of capital costs and stock prices.”
The bank believes that as a politician who has long advocated for more proactive use of retained earnings, the Takaichi government may accelerate corporate reform, driving the Japanese stock market higher by expanding price-to-book and price-to-earnings ratios. If capital costs drop 0.5 percentage points even with growth rate unchanged, P/E ratios could still rise by about 1x.
Morgan Stanley also highlighted the impact of ESG rating improvements. The bank believes that Takaichi’s appointment as Japan’s first female prime minister is expected to garner international recognition from a governance and diversity perspective, potentially lowering Japan’s ESG risk premium. In recent years, institutional investors have strengthened ESG-oriented investment policies, and the emergence of Japan’s first female prime minister may trigger renewed foreign buying of Japanese shares as a signal of commitment to governance reform.
Finally, Morgan Stanley pointed out that foreign investors prefer large-cap, highly liquid stocks. As the mid-October earnings season accelerates, corporate share buybacks and similar actions often increase, and the seasonal net buying pattern from foreign investors usually emerges. Takaichi’s appointment could amplify this seasonal trend.
In addition to well-performing value and growth stocks exposed to external demand, attention should also be paid to laggards that could be quickly repriced due to earnings revisions or other positive catalysts, including this quarter’s corporate actions.
Citi: Policy Stability Supports the Ongoing Bull Market
Citi’s report emphasized that although the LDP and Japan Innovation Party coalition does not hold a majority in either the lower or upper house, small conservative parties and independent lawmakers ultimately supported Takaichi. Additionally, many of Takaichi’s policies adopt stances long advocated by opposition parties, making it difficult for the opposition to resist such policies. Citi believes that the new government can effectively be seen as having a parliamentary majority, allowing policy to advance relatively smoothly.
Citi pointed out that LDP and Japan Innovation Party policies should drive Japanese stocks higher in the long run. In its report published after Takaichi’s election as LDP president, the bank said the outcome defied previous expectations and was driven by public opinion, reminiscent of Junichiro Koizumi’s 2001 and Shinzo Abe’s 2012 election victories. Citi believes that if Takaichi, like Koizumi and Abe, can establish a stable political base and implement popular policies, this could drive the Japanese stock market higher over the long term.
On the policy front, Citi expects the new Takaichi administration to:
1) Support measures like tax cuts for households facing continued real income declines;
2) Raise productivity by promoting investment in growth sectors;
3) Achieve a stable, virtuous cycle of wages and prices through these initiatives;
4) Rebuild defense and security policy in a tense international geopolitical environment.
Citi said the governing coalition agreement essentially matches these expectations and, if steadily implemented, has the potential to boost Japan’s economy and stock market.
Citi particularly emphasized that the current fundamentals of the Japanese economy are fundamentally different from the Abe era. The bank pointed out that while Takaichi’s economic policies are seen as consistent with Abenomics, the new prime minister is clearly aware of related concerns.
Citi cites three pieces of evidence supporting its view that 50,000 is only a checkpoint for the Nikkei 225:
1) The LDP–Japan Innovation Party coalition documents do not mention monetary policy or the exchange rate;
2) The new prime minister talks about responsible and proactive fiscal policy, distinct from simple fiscal expansion;
3) The appointments of Satsuki Katayama as Finance Minister and Takayuki Kobayashi as LDP Policy Research Council Chair, both finance ministry veterans, show that Takaichi is aware of current conditions and is striving for balance.
Citi said that with a Takaichi cabinet and the coalition holding a majority, TOPIX targets are 3400 for December 2025 and 3500 for March 2026, while the Nikkei 225 targets are 51,000 and 52,500, respectively. The bank also forecasts that by December 2026, TOPIX will target 3,800 and Nikkei 225 will target 55,000, with high-end expectations also at 3,800 and 55,000.
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