Japan’s stock market defied expectations on Monday with a significant rally, as the yen slipped to a three-month low following the country’s parliamentary election. The ruling Liberal Democratic Party (LDP) and its coalition partner Komeito secured 215 out of 465 seats, falling short of the 233 needed to win power in Japan’s lower house.
This unexpected outcome has raised concerns that Prime Minister Shigeru Ishiba may face difficulties in passing his party’s policies, potentially leading to a new coalition with a third party. Izumi Devalier, chief Japan economist at Bank of America, expressed caution, stating that the uncertainty surrounding the new government’s composition and policies may negatively impact yen assets.
Despite these concerns, Japan’s benchmark index Nikkei 225 closed up 1.82% on Monday, while the Topix index gained 1.5%. The Nikkei 225 has seen a significant increase of around 15% since the start of the year, while the Topix index is 11.7% higher.
Neuberger Berman’s Kei Okamura believes the current rally may be short-term, citing ongoing uncertainties in Japan’s medium to longer term. Okamura expects the ruling coalition to introduce new measures with other parties, potentially leading to a “murky” outcome.
Okamura is now betting on “higher quality companies with good pricing power.” Small- and mid-cap stocks look most attractive to him from a fundamentals and valuations perspective given the resilience of Japan’s domestic economy and the potential for the yen to appreciate.
He remains invested in “good quality companies across the board,” including large-cap stocks like Hitachi, Mitsubishi Logistics, Tokyo Marine Holdings, Resorttrust, and USS. Okamura describes these companies as “very good quality companies that are market leaders in their respective fields.”
The Japan Equity Engagement Fund, where Okamura is a portfolio manager, had year-to-date returns of 20.17% as of October 28.
Okamura expects the yen to appreciate in the mid to long term, driven by the Fed’s rate cuts and Japan’s potential rate increases. The Bank of Japan’s steady stance and the possibility of the U.S. Federal Reserve not cutting rates at its upcoming meetings have created uncertainty around the yen’s direction.
