- Japan’s upper house election yielded a minority government for the LDP-led ruling coalition
- Fiscal policy remains unclear due to diverging approaches of the LDP and opposition parties
- Delays in fiscal stimulus could prompt a more cautious approach to normalisation by the BOJ
- Remain neutral on Japan equities, given ongoing domestic transformation and trade deal with the US
- We maintain our preference on domestic demand-driven equities
Related Insights
This political landscape has several key implications: (i) fiscal and monetary policy directions remain ambiguous and (ii) potential political shifts warrant close observation in the coming months. These include potential internal LDP pressure on Ishiba to resign or a possibility of expanding the ruling coalition to overcome potential legislative gridlock.
One key uncertainty was resolved immediately after the elections with the finalisation of the trade deal with the US which lowered Japan’s tariffs from 25% to 15%, including a noticeable reduction in auto tariffs to the same rate.
Fiscal and monetary policies remain complex. Inflation and rising living costs were dominant themes throughout the election campaign, highlighting the diverging approaches of the LDP and opposition. The LDP favours direct cash subsidies to ease household burdens, while opposition parties advocate for consumption tax cuts, i.e. either a temporary 0% tax on food for one year or a universal cut to 5%. A potential compromise—such as concessions on tax cuts in exchange for opposition support on key legislation—cannot be ruled out.
Persistently high inflation suggests that the Bank of Japan (BOJ) should maintain its course towards policy normalisation. However, delays in fiscal stimulus measures could prompt a more cautious approach from the BOJ. Furthermore, any implementation of consumption tax cuts could raise concerns about fiscal sustainability and drive bond yields higher, potentially requiring the BOJ to maintain a strong presence in the JGB market for an extended period.
We maintain our neutral stance on Japan equities despite these uncertainties as Japan’s ongoing domestic transformation, driven by corporate governance, is likely to support market strength. In the public markets, Japanese corporations have emerged as the largest equity buyers, repurchasing JPY7.9tn (USD50bn) worth of domestic stocks in 2024—a record amount. Buybacks continue into this year with 1H25 exceeding 2024 full-year numbers. A successful trade deal with a lower-than-expected tariff rate offers a potential catalyst for near-term growth in Japan equities.
We continue to prefer:
1. Domestic demand-driven equities as fiscal loosening (via LDP’s supplementary budget or oppositions’ consumption tax cut) will boost domestic consumption. Preferred sectors are outlined below:
- Technology & Comms. Services: Domestic-focused technology and services such as software and IT services where domestic market is strongly driven by digital transformation and margins improvement via offshoring; internet and digital media companies where growth is driven by local user engagement, advertising, and digital services—these activities are less impacted by tariffs or currency.
- Cons. Staples: Retailing such as drugstores and supermarkets with strong domestic demand, margin improvement potential, and market share gains.
- Healthcare: Pharmaceutical and medical devices where demand is elastic and are thus, less affected by tariffs or currency fluctuations.
- Defence: The industry can benefit from government contracts and are less vulnerable to trade and currency fluctuations. Under its five-year plan initiated in 2022, Japan is raising its defence spending to 2% of GDP by 2027 from around 1%.
- Financials: Banks are undervalued and will continue to benefit from steady profit growth. While insurance is less exposed to trade risks, we are less positive on life insurance companies, given the concerns on balance sheet erosion when bond yields rise, should there be a mismatch in liabilities and assets.
Source: LSEG, DBS
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