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The Secular Bull Case for Japanese Equities: Three Structural Shifts
The panel expresses strong, long-standing conviction regarding a multi-year, secular bull market in Japanese equities, driven by three core structural—rather than cyclical—changes [00:02:06]:
Macro Environment Regime Shift: The emergence of stable, concurrent inflation and wage growth, a macroeconomic phenomenon not seen in decades. This structural shift is fundamentally altering household and corporate balance sheet management behaviors [00:00:59].
Structural Corporate Profit Improvements: Corporate margin expansion is no longer reliant on deflationary cost-cutting. Japanese corporates have significantly improved their nominal "price pass-through" capabilities, positioning them to grow profits sustainably in a nominal growth environment [00:01:23].
Corporate Governance & Capital Efficiency Reform: Awareness regarding capital efficiency has structurally increased across corporate Japan, manifesting in a sustained rise in share buybacks, dividend payouts, and corporate portfolio restructuring [00:01:40]. This secular trend is actively supported by the investment policies of the Takaichi administration [00:01:57].
Pressure Testing the Bull Case (Downside Risk vs. Upside Scenario)
The Bear Risk: If long-term interest rates rise too sharply due to domestic fiscal deficits or a Bank of Japan (BOJ) lagging "behind the curve," the cost of capital will rise, compressing equity valuations [00:02:53].
The Structural Mitigation (June Policy Catalyst): In June, the Japanese government will release its basic fiscal policy (Honebuto policy). The panel anticipates a credible fiscal plan, potentially under a Japanese version of the "Dodge Line" led by Finance Minister Katsunobu Kato [00:03:09, 00:03:19]. This would alleviate excessive fiscal risk premiums and lower the cost of capital [00:03:27].
The Latent Capital Catalyst: The panel notes that if they are wrong, it is likely due to insufficient bullishness [00:04:07]. Japanese corporates hold an extraordinary volume of non-cash-generating assets, with cash and bank deposits alone equivalent to 60% of Japan's GDP—a ratio vastly higher than global peers, leaving massive headroom for equity-enhancing capital allocation [00:03:34, 00:03:42].
Structural Shifts in Domestic Capital Flows & Financial Sector Dynamics
The transition to a reflationary regime is prompting massive, structural reallocations of capital away from fixed-income products like Japanese Government Bonds (JGBs) [00:04:35]:
The Domestic Banking Sector: Despite higher domestic yields, major Japanese banks are not actively buying JGBs [00:04:51]. This is because core commercial lending growth has accelerated aggressively—surging to ~6% year-on-year in April 2026 [00:05:49]. This lending boom is being fueled by heavy corporate capital expenditures looking to improve productivity amid Japan's structural labor shortages [00:05:16]. As long as high-margin lending is robust, banks have zero incentive to park capital in securities [00:05:07, 00:05:55].
The Life Insurance Sector (Lifers): Japanese lifers are in a critical structural squeeze and are acting as net sellers of long-duration JGBs [00:06:03, 00:07:12]. Lifers aggressively closed their duration mismatches by 2023 to prepare for new capital regulations taking effect this fiscal year [00:06:36]. However, due to the BOJ’s rapid monetary policy normalization, lifers are now struggling with massive mark-to-market and accounting impairment losses on their legacy long-term bond portfolios [00:06:55, 00:07:03].
Retail & Generational Asset Allocation: The demand for savings-type products by life insurers is shrinking because younger demographics are aggressively shifting capital into equities to defend their wealth against inflation, heavily utilizing the expanded tax-free NISA (Nippon Individual Savings Account) scheme launched in 2024 [00:06:03, 00:06:12].
Sanaeomics: The Supply-Side Policy Architecture
Yamaguchi outlines the long-term growth and structural policy framework under Prime Minister Sanae Takaichi, termed "Sanaeomics " [00:07:55, 00:08:24]:
Sanaeomics vs. Abenomics: While Abenomics focused heavily on the demand-side via aggressive monetary easing to exit deflation, Sanaeomics shifts the priority directly to the supply-side, prioritizing intense domestic investment and productivity expansion [00:08:24, 00:08:33].
June Strategic Growth Blueprint: The administration's upcoming June growth strategy report will mandate targeted strategic investments across 17 specific strategic areas [00:08:01, 00:08:49]. Key pillars include:
National Security Convergence & Budgetary Overhauls: There is an explicit overlap between these 17 economic investment areas and Japan's National Security Strategy, which will be formally updated by the end of 2026 with an increased defense budget target [00:09:01, 00:09:08, 00:09:16]. The focus is heavily on accelerating dual-use technologies and securing supply-chain resilience [00:09:23].
Budgetary Process Reform: The administration is dismantling the deflation-era caps on non-social security spending [00:09:30, 00:09:37]. Budgeting will pivot away from volatile supplementary budgets toward highly flexible, multi-year funding frameworks baked directly into the initial annual budget to support long-term capital horizons [00:09:48].
Capital Group: 2026 Midyear Outlook | 16 July 2026
1. Executive Briefing TL;DR The Core Thesis: The 2026 mid year macroeconomic landscape exhibits resilient trend GDP growth of approximately 2%, driven primarily by an unprecedented artificial intelligence capital expenditure boom and robus…