What does PM Sanae Takaichi’s decisive election victory mean for interest rates and for value investors?

Japanese Prime Minister Sanae Takaichi plans to ramp up government spending following her decisive election victory could lend extra support to value investors, says Asset Management One, which is one of Japan’s largest fund managers with $510bn in assets under management.

Asset Management One explains that increased Government spending makes interest rate hikes more likely, which will in turn should improve the earnings of banks – which are a significant component of most value investors’ portfolios.

Another factor is the war in the Gulf, which has sent oil prices higher. Asset Management One believes that if the war turns into a prolonged conflict, higher energy prices will keep upwards pressure on inflation, and we could see an earlier interest hike to keep it under control.

Value investors target shares that trade below their intrinsic value and Japan’s ultra-low-interest rate environment, which saw rates turn negative for over eight years, left the share prices of many Japanese banks deep in value territory.

Japan’s escape from deflation and its gradual normalisation of interest rates has led to a widening of the spread between the short- and long-term interest rates. This has allowed banks to increase the margin between the interest rate at which they borrow from the central bank and the rate at which they lend money.

Asset Management One noted that the Japanese government’s recent appointment of dovish Professors Toichiro Asada and Ayano Sato to the Bank of Japan’s policy board, could lead to the market paring back expectations of a rate hike in the short term.

However, it says that over the medium to longer term, the Takaichi administration’s expansive fiscal policy will sustain the inflationary pressures facing Japan. This would force the Bank of Japan to respond with rate hikes to keep inflation in check.

Takaichi is expected to use her new majority to push through an enlarged spending programme, with more cost-of-living support measures and economic stimulus, when she updates her spending plans in June. Prior to the election, Takaichi’s administration approved a record Yen122.3 trillion [$798.1 billion) budget for 2026.

Asset Management One said that it is “reasonable to assume” that should Takaichi increase government spending, it “will exceed the scope of both the FY2025 by supplementary budget and the initial FY2026 budget proposal”.

Asset Management One expects the Bank of Japan to raise rates twice this year. It believes that the Bank’s next rate hike will be a quarter point increase in July, taking it up to 1%. It says the base rate could hit 1.5% next year, even without the prospect of increased government spending.

Further BoJ hikes will help improve bank profit margins. The difference between the five-year and one-year Japanese Government Bond yields (a rough proxy for the lending margin that banks profit from) has risen from 4 basis points in 2020 to 73.9 basis points*.

Since the Bank of Japan’s base rate turned positive in April 2024, the price-to-book ratios (PBR) of Japan’s megabanks have risen from less than 1 to an average of 1.4**. PBR is a key PBR value metric and scores of less than 1 means that the market believes a company is worth less than its assets.

The improved PBR ratios of Japan’s megabanks are an example of how Japanese companies overall are shedding their reputations for being value traps. Efforts from government officials and the Tokyo Stock Exchange (TSE) to improve capital efficiency have resulted in the proportion of TSE Prime companies with PBR rations below 1 falling from 50% in 2022 to 44% in 2025.

Asset Management One says Japan was “the standout performer” among developed markets in 2025, with the Topix index climbing 22.4%, thanks in part to the strong performance of value shares.

Although Japanese equity valuations are improving, they are still undervalued compared to other developed markets. Japanese large and mid-cap companies have an average PBR of 2***, whereas their British, European and US counterparts have PBR scores of 2.48, 2.52 and 5.4 respectively. Globally, the average PBR is 3.93.

*Tullett Prebon data from WSJ.com

**Data from Bloomberg

***MSCI data