J.P. Morgan Japan Equity Strategy: Sanaenomics — A Snap Election and Rising Japan-China Tensions
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J.P. Morgan expects a snap election in early 2026, with Prime Minister Sanae Takaichi potentially dissolving the lower house in early-to-mid February. Sustained Sanaenomics policies could lift equities while pressuring the yen. Concurrently, China announced enhanced export controls on dual-use items to Japan on January 6, restricting rare earth minerals and magnets, echoing the 2010 disruption. Historically, TOPIX rose approximately 15% from two months before to three months after snap elections in 2014 and 2017. Financials typically outperform during rate hike cycles. However, the government and Bank of Japan may prevent further yen depreciation, suggesting the beneficiary order: overseas-demand cyclicals, followed by domestic-demand cyclicals and financials, and lastly domestic defensives. Regarding the rare earth restrictions, the 2010 episode lasted four to five months and caused related equities to drop roughly 10%, though earnings continued growing. Short-term pressure will likely affect AI/semiconductors, autos, and transportation logistics, while domestic cyclicals remain relatively insulated. J.P. Morgan identifies five investable themes: banks and real estate benefiting from inflation and rate hikes, construction passing through costs, digital transformation/gaming/food/railways/pharmaceuticals with underestimated earnings, autos where tariff relief outweighs rare earth impacts, and broader consumer spending.