Japan’s Prime Minister, Shigeru Ishiba, announced over the weekend that he will step down, ending months of speculation.
Ishiba’s time in office has not been a success for the Liberal Democratic Party (LDP). He took a major gamble by calling a Lower House election in October 2024, a move that backfired. In July, just over a month ago, he presided over another setback when the party lost its majority in the Upper House elections.
Despite this, Ishiba initially resisted calls to step down. A brief recovery in approval ratings even suggested he might yet hang on. However, the situation shifted last week with the resignation of Hiroshi Moriyama, a close aide, which made it clear that Ishiba’s position was no longer tenable.
Now, the LDP is once again searching for a new leader, a familiar situation for Japanese politics. Investors, too, are well accustomed to this cycle.
Leading candidates
Two figures stand out as the leading candidates, though others are likely to enter the race in the coming days:
- Shinjiro Koizumi
Son of former Prime Minister Junichiro Koizumi
Popular among LDP members and key factions
Likely to push labour market reforms and a stronger focus on green energy
Good ties with opposition parties, coalition friendly
- Sanae Takaichi
A protégé of the late Shinzo Abe
She would become Japan’s first female Prime Minister
Dovish stance on both fiscal and monetary policy
Less popular with opposition parties, making coalition harder
A leadership election is expected in late September or early October.
Market reaction
For markets, the immediate impact looks limited but broadly positive, though some volatility is likely as the race unfolds.
A Koizumi victory will likely bring no major change to fiscal or monetary policy. In time, equities will benefit from an acceleration in labour deregulation which would have a significant benefit on Japanese corporates.
A Takaichi victory could accelerate the end of Japan’s tightening cycle, given her dovish stance on monetary policy. The Fund has been reducing exposure to Japanese financials over the past 12 months, believing much of the tightening trade is already priced in.
We remain positive on Japanese equities in the months ahead. While we acknowledge risks from a slowing global economy (tariffs) and domestic elections, these are more likely to affect large-cap, cyclical stocks. In contrast, mid and small-cap companies, which form the core of our portfolio, continue to benefit from strong tailwinds in corporate governance reform. There remains ample opportunity to redistribute capital to shareholders or reinvest for growth.
These tailwinds have been the primary driver of portfolio performance, with the Fund (S JPY share class) returning 18.1% year to date compared with a return of 12% by its benchmark, the TOPIX Total Return Index*. Performance has been underpinned by both increased M&A activity and rising shareholder returns.
On the M&A front, we have seen successful bids for Torii Pharmaceutical and Fujitsu General, while Toyota Industries is currently the subject of a tender offer from its parent, Toyota. Shareholder returns have also reached record levels, particularly through buybacks in the first quarter. Argo Graphics, a high-quality software company, recently announced a 20% buyback programme and earmarked significantly greater funds for future shareholder distributions.
Corporate reform continues to provide strong tailwinds for Japanese equities. These structural changes will persist regardless of the outcome of the LDP leadership race and are expected to remain a key driver of both market and portfolio performance.
*Source: Polar Capital, as at 31 August 2025. Performance quoted in yen with income reinvested. Past performance is not a guide to future returns.
