We remain overweight Japan within a global equity portfolio, encouraged by the prospect of a more pro-growth new prime Minister. The economic and corporate profit backdrop was already positive for Japan and the prospect of a more pro-growth government following the election of Senae Takaichi as LDP leader triggered a strong equity rally early last week, although the outlook is now less clear after an apparent split between the LDP and its main coalition partner.
Investors will be wary about the durability of the rally in Japanese equities, because policymakers have repeatedly promised a lot and always underdelivered. That said, there is huge potential relative equity (and yen) upside should Japan actually deliver a sustained recovery with positive inflation, as this could finally break the entrenched concern that secular stagnation will eventually return.
