Japan stock market outlook 2025: politics and opportunity

In a year of elections, Japan joined the group where the poll was called unnecessarily early and with a disastrous outcome for an overconfident leader.

The Liberal Democratic Party – which despite its name is Conservative rather than Liberal – has governed Japan almost uninterrupted since the Second World War, but that dominance has often led to complacency and in-fighting. It has also encouraged party leaders to stick to a very conservative line in terms of its programme and made it hard to bring in innovative policies in times of economic stagnation.

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Thus Japan, one of the most go-ahead countries in the 1960s and 1970s, has meandered through lost decades as it failed to cope fully with competition from the emerging Asian tigers of Taiwan, South Korea and Singapore, followed by the sudden leap forward in China.

The latest bout of power play within the LDP arose when Shigeru Ishiba, the former defence minister, ousted Prime Minister Fumio Kishida in September. That followed a series of scandals concerning party funding and how ministers use public funds, undermining trust in the LDP.

At the age of 67, Ishiba is hardly a young buck heralding a youthful new dawn, and he was not an overwhelming choice even within his own party, winning a tight contest for the leadership. He had curried favour with the electorate by being openly critical of leading LDP figuresincludingJapan’s longest-serving leader Shinzo Abe, who many party stalwarts considered beyond reproach.

Days after taking over the premiership, Ishiba called a snap election, held in November, in which the LDP and its coalition allies New Komeito lost their hefty majority in the House of Representatives and fell 18 seats short of a majority.

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Fortunately for Ishiba, the opposition is even more divided than the LDP, with seats split among the Constitutional Democratic Party of Japan and two other smaller parties. He survives as prime minister for now, but faces hostility within his own party, plus having to listen to demands from at least one opposition party to get any bills or budgets through the Japanese parliament.

The current government is therefore likely to be short-lived, especially as a minority government is extremely rare in Japanese politics, so the country has never got used to the concept. In the meantime, the small New Democratic Party is expected to shore up the government in return for substantial tax cuts. The NDP will not, however, formally join the ruling coalition.

All parties will be casting nervous eyes on next summer’s elections to the House of Councillors, the upper house. An election of both houses could be held at that time, with the wealthy LDP, probably by then operating under a new leader, having an advantage in the expensive campaigning that characterises Japanese general elections.

The likely decline in Japan’s standing on the world stage during a period of political uncertainty means that the country will not have a strong voice in protecting its trading interests, particularly if new US President Donald Trump starts to impose tariffs. This would have a particular impact on Japanese steel.

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Investors must hope that Ishiba can, against all odds, strengthen his hand. He has promised to revive the Japanese economy and double defence spending, which will give a further boost to domestic manufacturing.

He could yet succeed. Domestic demand, fuelled by persistent wage inflation, has held up quite well, and analysts familiar with the Japanese economy have been upgrading their earnings forecasts. Any tax cuts forced on the government will give a further boost. Some commentators actually believe that the outlook is improving more for Japanese companies than for their counterparts in America and Europe.

Hobson’s choice: I am dubious about prospects for Japanese companies as sporadic talk of a revival has led nowhere for too long. If you disagree, then look for stocks that rely on domestic demand rather than international trade. The yen remains strong, which may dent exports, particularly for car makers. For most private investors with little direct knowledge of Japanese economic and political news or of Japanese culture, it is sensible to channel any investments through a fund where a professional with more intimate Far Eastern knowledge has a distinct advantage.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.