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Weekly Perspectives: Japan at a crossroads?

Anthony Willis

Senior Economist, Multi-Asset Solutions team

Key Takeaways

Early September saw Prime Minister Shigeru Ishiba announce his intention to step down. This coming weekend we see the elections for a new PM take place.
There are two candidates. Sanae Takaichi – who would be Japan’s first female Prime Minister – and Shinjiro Koizumo, the current agriculture minister.
Koizumo is the favourite, but the result is expected to be close. Takaichi would likely be more interventionist, and her victory could spook markets wary of higher debt levels.
Given the Liberal Democratic Party’s lack of parliamentary majority, agreements with other political parties would need to be made in the event of a Koizumo victory. We would expect this to occur.
We have become less cautious on Japan and have selectively increased exposures. The economy remains positive and corporate reforms, together with positive earnings guidance, offer support.

Transcript

This week we are looking at Japan – a country that’s going to be in focus at the end of the week thanks to upcoming elections. There is a new leadership election following Prime Minister Shigeru Ishiba stepping down having lost both the upper house and lower house elections. The leadership elections come at an interesting time for Japan. The country is facing a period of inflation – a trend it hasn’t seen for decades – and the Bank of Japan is on the cusp of raising interest rates. The Japanese economy is proving relatively resilient despite US tariffs and an adjustment in wages that is taking place, with inflation becoming embedded in the economy.

There are two main contenders for the leadership elections. The first is Sanae Takaichi who could potentially be the first female Prime Minister in Japan, and the second is Shinjiro Koizumi, who is currently agriculture minister. Shinjiro is the more reformist of the candidates and is son of former Prime Minister Junichiro Koizumi, who led the country between 2001 and 2006 and was an extremely popular.

Koizumi is favourite but the vote is expected to be close. If Takaichi takes power, we could see more of a move in financial markets given Takaichi’s more interventionist stance and likely moves to increase fiscal stimulus (Koizumo is more cautious here). However, big government spending in a country where debt-to-GDP is already 260% is something that can and maybe will spook bond markets. It is worth noting, however, that most Japanese debt is held by a domestic audience, which means it is less vulnerable than, say, UK debt, which to use a phrase from former Bank of England governor Mark Carney relies on the ‘kindness of strangers’. Takaichi has also talked about the Bank of Japan being ‘stupid’ in raising interest rates, but with inflation becoming embedded in Japan and stuck around 3.0%, the Bank of Japan is likely to move rates even higher from what is currently an 18-year high. At 0.5%, however, they remain relatively low. If Koizumi wins the election the Bank of Japan will feel they have some room to manoeuvre and to raise interest rates later this month.

So, we will learn the outcome of the election this coming weekend, but it is worth bearing in mind that with the lack of a parliamentary majority, the Liberal Democratic Party may not automatically get their candidate anointed as Prime Minister. The appointment needs to be voted on by parliament, so they would have to reach some agreement to get things across the line. We have seen such deals in the past and there are enough parties that are aligned from an ideological point of view to get the vote through.

In terms of our views on Japan, we are a little bit more positive and within multi-asset portfolios have increased exposures to a more neutral stance. Economic fundamentals look reasonably positive and there is resilience despite tariffs and the impact of inflation. We expect to see Japan’s economy grow by more than a percent this year, with continued positive momentum from corporate reforms and positive earnings guidance. We are also seeing increasing share buybacks. Overall, we see an encouraging backdrop but will be watching political developments closely.

29 September 2025

2025年 September 29日

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Weekly Perspectives: Japan at a crossroads?

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