Wall Street believes that Takami Saito is "bullish" on Japanese stocks: the bull market continues, and valuations are rising

The appointment of Japan's first female Prime Minister, Sanae Takaichi, is triggering a collective bullish sentiment among Wall Street investment institutions. Morgan Stanley and Citigroup both believe that this historic political shift will drive the expansion of Japanese stock market valuations and maintain a bullish trend.

According to CCTV News, on October 21 local time, in the second round of voting for the Prime Minister's nomination in the Japanese Senate, Sanae Takaichi, the president of the Liberal Democratic Party, received 125 votes, winning the election and becoming Japan's 104th Prime Minister, as well as the first female Prime Minister in Japanese history.

On October 23, according to news from the Wind Trading Desk, Morgan Stanley pointed out in its latest research report that Takaichi's appointment symbolizes structural reform and leadership diversity, and is expected to drive the expansion of Japanese stock market price-to-earnings ratios through three main pathways: growth strategy expectations, accelerated corporate governance reforms, and improved ESG evaluations.

Citigroup emphasized in its latest research report that the new government effectively has majority support in Congress, allowing policies to be implemented relatively smoothly. The bank maintains its previous forecast that the TOPIX index will reach 3,400 points by the end of December 2025 and 3,500 points by the end of March 2026, while the Nikkei 225 index will reach 51,000 points and 52,500 points. Citigroup believes that 50,000 points is merely a "checkpoint" for the Nikkei 225 index, not an endpoint.

Morgan Stanley: Three Pathways to Drive Valuation Expansion

Morgan Stanley elaborated in its report on how Takaichi's government will enhance Japanese stock market valuations.

The bank believes that if the government implements growth strategies and promotes corporate governance reforms, the expected growth rate of enterprises could increase by 0.5 percentage points, while capital costs decrease by 0.5 percentage points, leading to an approximate doubling of the expected price-to-earnings ratios for the Nikkei index and TOPIX.

In terms of growth strategies, Morgan Stanley expects that the growth initiatives advocated by the Liberal Democratic Party and the Japan Innovation Party will enhance corporate profit growth expectations and expand price-to-earnings ratios. Both parties are promoting market-friendly policies such as fiscal stimulus, tax cuts, deregulation, and innovation support.

The bank noted that if these policies raise the long-term expected growth rate of Japanese companies by 0.5 percentage points while capital costs remain unchanged, the theoretical price-to-earnings ratio could increase by about 1 time.

Regarding corporate governance reforms, Morgan Stanley specifically mentioned that Takaichi referred to the possibility of taxing retained earnings in her 2021 book "Towards a Beautiful, Strong, and Growing Nation."

In the 2024 Liberal Democratic Party presidential election, she reiterated the need to revise corporate governance guidelines, requiring companies to disclose how they use retained earnings. This aligns with the Financial Services Agency and the Tokyo Stock Exchange's push for "awareness of capital costs and stock price management."

The bank believes that as a long-time advocate for more active use of retained earnings, Takaichi's government may accelerate corporate reforms, driving the continuous rise of the Japanese stock market through expanded price-to-book ratios and price-to-earnings ratios. If capital costs decrease by 0.5 percentage points, even if the growth rate remains unchanged, the price-to-earnings ratio could also increase by about 1 time Morgan Stanley also emphasized the impact of improved ESG ratings. The bank believes that the appointment of high-profile female Prime Minister will likely receive high international recognition from the perspectives of governance and diversity, potentially reducing Japan's ESG risk premium. In recent years, institutional investors have been strengthening ESG-oriented investment policies, and the emergence of Japan's first female Prime Minister may trigger foreign investors to re-enter Japanese stocks as a signal of commitment to governance reforms.

Finally, Morgan Stanley pointed out that foreign investors prefer large-cap, high-liquidity stocks. As the mid-October earnings season accelerates, corporate stock buybacks and other actions often increase, and the seasonal net buying pattern of foreign investors typically emerges. The appointment of high-profile female Prime Minister may amplify this seasonal trend.

In addition to already performing well in external demand value stocks and growth stocks, attention should also be paid to lagging stocks that may be quickly revalued due to earnings upgrades or other positive catalysts, including corporate actions in the current period.

Citigroup: Policy Stability Supports Continuation of Bull Market

Citigroup emphasized in its research report that although the ruling coalition of the Liberal Democratic Party and the Japan Innovation Party did not gain a majority in both the House of Representatives and the House of Councillors, smaller conservative parties and independent lawmakers ultimately supported high-profile female Prime Minister. Furthermore, many of high-profile female Prime Minister's policies incorporate positions emphasized by the opposition parties, making it difficult for the opposition to oppose these policies. Citigroup believes that the new government can be seen as effectively holding a majority in Congress, and policies will be relatively smoothly advanced.

Citigroup pointed out that the policies of the Liberal Democratic Party and the Japan Innovation Party should drive the Japanese stock market up in the long term. The bank noted in its report released after high-profile female Prime Minister was elected as the president of the Liberal Democratic Party that the election results overturned previous expectations and were driven by public opinion, reminiscent of the elections of Junichiro Koizumi in 2001 and Shinzo Abe in 2012. Citigroup believes that if high-profile female Prime Minister can consolidate a stable political foundation and implement policies supported by public opinion like former Prime Ministers Koizumi and Abe, this could drive the Japanese stock market higher in the long term.

In terms of policy expectations, Citigroup believes that the new high-profile female Prime Minister government is expected to:

1. Support tax cuts and other measures for households facing continuous declines in real income;

2. Improve productivity by promoting investment in growth areas;

3. Achieve a stable virtuous cycle of wages and prices through these measures;

4. Rebuild national defense and security policies in the context of tense international geopolitical situations.

Citigroup stated that the policies outlined in the ruling coalition agreement generally align with these expectations, and if implemented steadily, have the potential to boost the Japanese economy and stock market.

Citigroup particularly emphasized that the current fundamental situation of the Japanese economy is fundamentally different from that during the Abe administration. The bank pointed out that although the economic policies of high-profile female Prime Minister's government are considered consistent with Abenomics, the new Prime Minister is undoubtedly aware of the related concerns.

Citigroup noted that three pieces of evidence suggest that its view that 50,000 points is merely a checkpoint for the Nikkei 225 index remains valid:

1. The coalition agreement document of the Liberal Democratic Party and the Japan Innovation Party does not mention monetary policy or exchange rates;

2. The new Prime Minister talks about responsible and proactive fiscal policies, which is different from a simple fiscal expansion approach;

3. The appointment of key personnel from the Ministry of Finance, including Katsuyama Satsuki as Finance Minister and Kobayashi Eiji as Chairman of the Liberal Democratic Party's Policy Research Council, indicates that Kishi Sanae is aware of the current situation and is striving for balance.

Citigroup stated that under the Kishi Sanae cabinet and with the ruling coalition holding a majority, the target for the TOPIX index is 3400 points for December 2025 and 3500 points for March 2026, while the target for the Nikkei 225 index is 51000 points and 52500 points, respectively. The bank also predicts that by December 2026, the target for the TOPIX index will be 3800 points and for the Nikkei 225 index will be 55000 points, with peak expectations of 3800 points and 55000 points, respectively