Is the Japanese stock market heading towards a "long-term bull market"? Citigroup: The Nikkei Index reaching 50,000 points is just a midway stop

The Japanese stock market is showing strong momentum towards a long-term bull market, significantly rising over the past month due to a robust global market and optimistic expectations for the new government's economic policies. Citigroup has boldly predicted in a recently released strategy report that the Nikkei 225 index reaching 50,000 points will merely be a "way station" on the path of the bull market, and the long-term upward trend of the Japanese stock market is far from over.

According to the Chase Wind Trading Desk, Citigroup set a target price of 55,000 points for the Nikkei 225 index by the end of 2026 in a report released on October 30 by analysts including Ryota Sakagami. This optimistic outlook is primarily based on three pillars: the new government is expected to smoothly implement supportive economic policies, corporate fundamentals remain strong in an inflationary environment, and the undervaluation of Japanese stocks has long-term correction potential.

The report points out that the new Prime Minister Sanae Takaichi's government is expected to implement measures, including tax cuts, to support household budgets and improve productivity by promoting investment in growth sectors, potentially creating a stable "wage-price" virtuous cycle. If these policies can be steadily implemented, they are expected to become key catalysts for boosting the Japanese economy and stock market.

Although Citigroup acknowledges that, in the short term, the 12-month forward price-to-earnings ratio of the Tokyo Stock Exchange Index (TOPIX) is nearing historical highs, and there are signs of weakening in the global tech stocks that support the rise of Japanese stocks, the report emphasizes that the market is unlikely to repeat the significant pullback seen in August of last year. Analysts believe that any short-term market adjustments should be viewed as "buying opportunities on dips."

New Policy Dividends? The High Government May Become a Catalyst for the Stock Market

Citigroup's report believes that the establishment of the new government and its policy agenda is one of the core logics supporting the long-term bullish trend of the Japanese stock market. The report notes that Sanae Takaichi, president of the Liberal Democratic Party, was elected as Japan's 104th Prime Minister on October 21. Although the ruling coalition formed by the Liberal Democratic Party and the Japan Innovation Party (JIP) does not hold a majority in both houses of Congress, many of Takaichi's policies resonate with the opposition parties, making it difficult for them to obstruct, and it is expected that policies can be implemented relatively smoothly.

According to the ruling coalition's agreement, the new government's policy framework aims to support households with declining real incomes through measures such as tax cuts; improve productivity by encouraging investment in growth industries; and achieve a virtuous cycle of wages and prices based on this. Citigroup analysts state that if these policies are steadily executed, their potential to boost the Japanese economy and stock market is enormous. The report compares this situation to that of Junichiro Koizumi in 2001 and Shinzo Abe in 2012, believing that a stable political foundation and publicly supported policies could become the driving force behind the long-term rise of Japanese stocks.

Profit Resilience Amid Inflation

In terms of fundamentals, Citigroup believes that Japanese companies are demonstrating strong profitability in a sustained inflationary environment. The report shows that since 2023, the proportion of companies exceeding quarterly earnings expectations (i.e., "earnings surprise rate") has consistently been over 50%, and corporate sentiment is also on the rise This trend is particularly evident in the non-manufacturing sector, especially in industries driven by domestic demand. Data shows that even in the case of stagnation in output growth, inflation is still pushing up sales in the non-manufacturing sector. More importantly, the transmission of rising prices is helping companies improve their profit margins. Citigroup expects that if the new government's tax reduction measures can successfully boost residents' real income, it will further consolidate inflation expectations, thereby ensuring that companies primarily focused on domestic demand continue to report strong profits.

Valuation recovery still has potential, and there is room for foreign capital inflow

Although the valuation of the Japanese stock market may show signs of overheating relative to global markets in the short term, Citigroup believes that from a longer-term perspective, its valuation range still has considerable upside potential. The report analyzes that the average return on equity (RoE) of Japanese companies is rising, thanks to improved profit margins in an inflationary environment and increased stock buybacks driven by corporate governance reforms.

Citigroup believes that as RoE continues to rise, the valuation central tendency of the price-to-book ratio (PBR) and price-to-earnings ratio (PER) is expected to gradually increase. The report points out that since 2010, the central tendency of the PER for the Tokyo Stock Exchange index has been around 14 times, but it could reach 16 times or even higher in the future. In addition, there is still "considerable room" for foreign capital to flow into the Japanese stock market. Statistics show that from 2025 to date, foreign investors have net bought 5 trillion yen worth of Japanese stocks, but considering the net selling trend since 2014 and the increase in global money supply during that period, there is still a large amount of foreign capital waiting to flow in. Therefore, the report concludes: "In the next year or so, 50,000 points will merely be a checkpoint for the Nikkei 225 index."

Short-term risks are controllable, and pullbacks may present good buying opportunities

Citigroup also pointed out the short-term uncertainties facing the market, including the forward price-to-earnings ratio of the Tokyo Stock Exchange index approaching historical peaks, the potential weakening of the rally in global tech stocks, and the unusually weak yen against the dollar.

However, the report believes that even if the yen strengthens and the stock market weakens in the short term, it is unlikely to repeat the significant pullback seen in August of last year. The reasons are: first, unlike the first half of 2024, the recent rise in Japanese stocks is no longer entirely dependent on yen depreciation; second, the current economic surprise indices for both Japan and the U.S. are at high levels, making concerns about economic deterioration difficult to intensify; finally, the current stock price return rates and earnings forecast adjustments are within a reasonable range, and there has been no situation where stock prices have deviated from fundamentals as seen last year. Based on this, Citigroup advises investors to view any market pullbacks triggered by short-term factors as good buying opportunities. In terms of investment strategy, the report recommends focusing on consumer-related stocks that may benefit from household support policies, as well as the real estate sector, which has long-term potential in the context of entrenched inflation