Investors see Fumio Kishida, Japan's new leader, as a constant consensus-builder who can lead the ruling Liberal Democratic Party and its coalition partner to victory in tainted general elections scheduled in November.
While Japanese equities are expected to benefit from Kishida's market-friendly image, less political uncertainties, and a better economy, investors are uncertain if he can push ahead with the tough measures necessary to boost economic health.
Kishida, 64, will become prime minister next week, and he inherits an economy that is gaining momentum owing to falling coronavirus cases, increased vaccinations, as well as a higher earnings outlook. read more
Invesco's global market strategist David Chao predicted Japan'S consumption and domestic expenditure to rise, surpassing the United States, UK, and Europe, with fiscal and monetary stimulus.
"The reflation trade for Japanese equities is just beginning, and I'm still bullish on Japanese risk assets," Chao told the Reuters Global Markets Forum (GMF).
Japanese shares (.MIJP00000PUS) have risen 1.6% in September, outperforming an over 3% drop in the United States ( (MIUS00 000P US) and Europe (.IEU000000 PUS).
Foreign investors were "facing an underweight squeeze" owing to strong corporate profit margins, low equity valuations and dissipating production bottlenecks," according to John Vail, head global strategist at Nikko Asset Management, at the GMF.
Nikko Asset Management estimates that the Nikei share average will reach 31,800 in December and 32,700 by June 2022.
Kishida's political, economic, and monetary policies, which his predecessors Shinzo Abe and Yoshihide Suga adopted, were expected to continue, both Chao and Vail expected.
"Kishida can be seen as a safe pair of hands, especially on the diplomatic front," said George Boubouras, head of research at K2 Asset Management in Melbourne.
Chao stated that a continuation of policies also implies fewer "the danger of premature fiscal belt tightening."
Vail, on the other hand, said Japan won't need any immediate stimulus beyond Kishida's 30 trillion yen ($270 billion) package, since the economy will begin to "very well" in the fourth quarter.
Kishida held key positions under Abe, who has a lot of influence in the ruling party, but his reserved style has also raised questions about whether he can push through reforms to increase competition.
"Markets probably view the outcome as a decision by the LDP to avoid changes. Kishida represents stability if you put it together nicely. However, if you put it poorly, the ship will continue sinking slowly, and that will not change," an investment manager at a major Japanese insurance firm said.
Abe's promise nearly a decade ago to implement structural reforms irritated investors, but many believe he fell short in terms of delivering results.
"If Kishida can envision a strait toward structural reform, this would most likely be appreciated by offshore investors and result in influx into Japan's stock market," Yunosuke Ikeda, chief equity strategist at Nomura Securities, stated.
There are unlikely to be significant policy initiatives in the near future, as an election for the lower house must be held by Nov. 28.
Being able to deal with an election campaign is "it will be difficult to talk about any severe reforms," said Shinichi Ichikawa, senior fellow of Pictet Asset Management.
"I don't believe investors will build large positions ahead of the election without knowing what types of policies will be implemented."