By Peter Wasko, senior portfolio manager at Copia Capital
People are fond of drawing comparisons between Japan’s prime minister Sanae Takaichi and UK Conservative prime ministers. She’s been compared with Margaret Thatcher and has been described as Japan’s Iron Lady. On the other side, some see the prospects of unfunded tax cuts as reminiscent of Liz Truss.
One prime minister she is not emblematic of, however, is Theresa May, who called a snap election in 2017 and ended up losing her majority government. By contrast, Takaichi won an unprecedented mandate for the LDP in February’s snap election.
Even though the LDP has led Japan almost continuously for 60 years since its formation, this has often been as part of coalition governments. Takaichi’s victory has given the LDP their largest majority since the second world war, surpassing the majorities held by her mentor Shinzo Abe.
With such a big mandate, voters will expect her to make headway on their economic concerns, but how will her approach impact the investment story?
Politics and debt
For investors, there is a lot to like about Takaichi’s policy as she is emphatically pro-business and pro-stimulus. But her suggestion of cuts to consumption tax (Japan’s equivalent to VAT) on food have also caused concern given the country’s high levels of economic debt. This led to signs of stress in Japan’s bond markets and some slight jitters in equities in the weeks leading up to the election.
Although Japan’s debt levels look eyewatering, it’s important to note that most of it is internally owned. In 2024 this was to the tune of 88%, with the Bank of Japan making up nearly half of that (46%). This doesn’t make high debt levels irrelevant, but it prevents the volatility that other bond markets can sometimes suffer when foreign investors decide to unload debt.
Also worth noting is the moderation in Takaichi’s language during the election trail. Although committed to easing cost of living pressures, she insisted the approach would be methodical and that some aspects of her rhetoric were being taken out of context.
Corporate governance story doesn’t change
The most important element for investors to be aware is the reform of corporate Japan, a narrative which looked set to continue even before the snap election.
Since 2021, the Tokyo Stock Exchange has incentivised reforms to remove bloat in the country’s corporate sector. Prior to this, conglomerates often held a tangle of crossholdings which didn’t tie into a core business focus, slowing corporate decision making and handicapping growth.
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However, reforms are encouraging listed conglomerates to slim down and offer shareholder friendly policies like dividends and share buybacks. This has helped with more efficient boardroom decisions and incentivised foreign investment. Perhaps the best example of this change is the increase in activist shareholders which are starting to re-enter the picture having previously grown frustrated with corporate Japan.
Crucially, we’re still near the beginning of this story. Most stocks are trading at a compelling discount and the broad Topix index, which includes Japan’s small to mid-cap stocks, is trading below book value. This wasn’t all that valuable pre-reforms but now we are seeing returns on investment rising.
The domestic hedge
As much as investors try to keep politics to a minimum, the fractious global geopolitics which caused market volatility last year have continued into 2026.
Though Japan’s new PM looks to have a good relationship with President Trump, the latter’s US administration remains incredibly unpredictable. The conflict in Iran has inevitably caused huge swings in Japanese markets. Japan imports 95% of its oil from the Middle East. Investors are rightfully concerned about the impact oil prices could have on the Japanese economy, especially while the yen is weak, leading many to sell some of their recent gains. So far, Japan has no plans to release any of their oil stockpiles like they did in 2022 following Russia’s invasion of Ukraine. While the situation needs to be monitored, we don’t think it fundamentally changes the narrative around Japan, especially if the conflict is resolved within the next few weeks.
Japan’s more immediate neighbours also pose potential issues. Takaichi has expressed public reverence for controversial figures amongst Japan’s war dead which has angered governments in Asia. And her stance on Tawain has angered China, who have subsequently discouraged Chinese tourists from visiting Japan. Beijing have also alluded to further escalation and trade barriers if they deem it warranted.
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Although Japan has begun deep sea exploration for rare earth minerals, this could take years to yield meaningful results, leaving them still largely dependent on China for this resource in the meantime. This could create a headwind for Tokyo listed large-cap stocks, particularly in tech, if relationships with Beijing are strained.
However, Japan’s small to mid-cap domestic stocks are more insulated from any potential frothiness in speculative valuations while also being natural beneficiaries of corporate governance reforms. Takaichi has done little to suggest that she’ll disrupt this balance and both her social and foreign policy are unlikely to cause stress in this area of the market.
The future picture
In many ways you can view the picture in Japan as similar to the US, with some political policy that investors find compelling and other areas that may be cause for concern. Investors should be particularly mindful of the geopolitical frictions alongside valuation and volatility concerns that exist among large-caps in both regions.
Where Japan departs from the US is in the value it offers without the same level of concentration risk. Considered regional exposure was an emerging trend in 2025 and it looks like portfolios could benefit from this in the future too, with some areas of Japanese equity markets in potentially positioned to play an important role.
