Japan Picks Fifth Leader in 5 Years. The Stock Rally Ignores the Politics.

Newly elected Liberal Democratic Party leader Sanae Takaichi. The MSCI Japan index is up 35% from its April 7 low. (Photo by Kim Kyung-Hoon – Pool/Getty Images)

Key Points

• The MSCI Japan index has risen 35% from its April 7 low, with the iShares MSCI Japan ETF up 20% year to date.
• Sanae Takaichi won the election to become Japan’s next prime minister, with strategists expecting minimal market disruption.
• Japanese households hold $15 trillion in financial assets, with only 20% in stocks, indicating potential for further market investment.

Japanese stocks have rebounded sharply after getting hit hard when the Trump administration unveiled its tariff policy in early April. Strategists expect Saturday’s election of Japan’s fifth prime minister in a bit more than five years to do little to derail the market’s momentum.

The MSCI Japan index is up 35% from its April 7 low following the tariff announcements and the political turmoil that led to the resignation of Prime Minister Shigeru Ishiba. The iShares MSCI Japan exchange-traded fund is up 20% year to date, besting the S&P 500.

Sanae Takaichi, an acolyte of former Prime Minister Shinzo Abe, won the election, putting her on track to become the country’s first female premier.

Five candidates ran. Strategists saw the race to succeed Ishiba primarily between agricultural minister Shinjiro Koizumi, son of former Prime Minister Junichiro Koizumi, who has celebrity status and would become the country’s youngest leader in modern times, and Takaichi.

Takaichi, 64, has moderated her stimulative stance. “Takaichi has been an apostle of Abenomics—loose monetary and fiscal policy,” David Boling, director of Japan and Asian trade for Eurasia Group, said. He didn’t view her as the front-runner, and noted that if she pulled off a win, “it could have some market reaction since Abenomics isn’t suited for the current problems of the economy, which is inflation, not deflation.”

Boling saw Koizumi, who is 44, as not having “much of a record but he would be more on the side of continuity and has been the most vocal about tackling inflation.”

In a note to clients, Gavekal analyst Udith Sikand sees the election as “little more than a sideshow” with neither candidate likely to upend the country’s gradual shift toward looser fiscal and tighter monetary policy. The country continues to navigate the emergence of inflation after decades of deflationary pressure.

The bigger factor for investors is that the market is still cheap—and has positive catalysts ahead. Among them: continued flows into Japanese stocks, which have already benefited from 10 trillion yen into a program that offers tax advantages for individual investors.

More than half of Japanese households’ $15 trillion in financial assets is still in cash, and their stock exposure is only 20%, leaving plenty of room to put more money into the market, Sikand says. That could become more enticing as the market benefits from regulatory reforms to improve corporate governance, which in turn fuel share buybacks that analysts expect to continue.

Even with the gains, Sikand notes that MSCI Japan’s price to book is at 1.5 times—its highest since 2007, but still below the more than two times emerging Asia trades at, and a fraction of the U.S. market that is closer to five times.

Even if politics create some market volatility, strategists are still upbeat about the market.

Write to Reshma Kapadia at reshma.kapadia@barrons.com