History Indicates Japanese Stocks Are Poised for Recovery After Ishiba-Led Decline: Citi

Japanese stocks have recently faced challenges as investor concerns grow over Shigeru Ishiba’s rise to the position of Prime Minister. Some analysts are urging investors to “buy the dip,” pointing out that historical patterns show such political shocks tend to be temporary.

Analysts from Citi expressed optimism, predicting that Japanese equities will recover as the year progresses. The recent decline followed Ishiba’s election as the leader of Japan’s ruling Liberal Democratic Party, which has indicated plans to dissolve the Lower House for a vote on October 27. Investors reacted negatively, worrying that Ishiba would not be favorable for the stock market.

However, historical data suggests that downturns in Japanese stocks during periods of political dissolution are often short-lived. According to Citi, Japanese equities typically experience an upward trend for two to three months following a dissolution, and this trend has strengthened since the early 2000s.

The market’s reaction to Ishiba’s election closely resembles the situation that unfolded when PM Kishida assumed office, which resulted in a significant market correction due to what was termed the “Kishida shock.” The impact of the “Ishiba shock” may lead the TOPIX index to fall to the 2,500-2,550 range, with the Nikkei 225 around 36,000, as per Citi’s estimates.

While some of Ishiba’s proposed policies—such as potential increases in income and corporate taxes—are considered less favorable for the market, the likelihood that he will retain existing cabinet members suggests continuity in key economic policies established by Kishida. Analysts believe there is minimal risk of the new government shifting toward negative economic policies as perceived by the market.

Citi posits that the “Ishiba shock” is likely to be temporary, citing the unlikelihood of significant policy changes from the Kishida administration. They go on to highlight several factors that support this assertion, including Ishiba’s limited experience with major economic sectors and his apparent intent to continue existing economic strategies.

With the potential for upward revisions to company outlooks at the half-year mark and the tendency for Japanese equities to perform well when the Federal Reserve begins a rate-cutting cycle, Citi is confident that Japanese stocks have the potential to rebound as the year draws to a close.