JPMorgan's latest Japanese equity strategy report indicates that, despite Japan facing a complex situation of a snap election, a weak yen, and rising long-term interest rates, Japanese stocks still have room to rise before the end of 2026. The core conclusion is: as long as the USD/JPY exchange rate does not break through 165, and the 10-year Japanese Government Bond (JGB) yield remains below 3%, the upward trend in Japanese stocks is unlikely to reverse. Short-term risks require vigilance against a pullback triggered by exchange rates and interest rates breaking through "critical points," particularly pressure from foreign capital outflows. However, from a medium-to-long-term perspective, improvements in corporate earnings, valuation recovery, and potential buying from domestic institutions like pension funds will provide support for the market. If the market experiences a pullback due to non-fundamental factors, similar to the situation in the summer of 2024, the Nikkei 225 index around the 48,000-point level would be considered an excellent buying opportunity. Election results determine the short-term direction, but the year-end bullish logic remains unchanged. Regarding the upcoming Japanese snap election on February 8th, the market's short-term reaction will depend heavily on the election outcome; regardless of the result, expectations for fiscal stimulus and political stability point towards a year-end stock market rise.

Baseline scenario (LDP wins a majority alone): The Nikkei 225 index may trade flat or dip slightly after the election but is expected to rebound subsequently, with a projected year-end 2026 target of 57,000 points. Weak scenario (LDP fails to win a majority): The market might initially fall to around 52,000 points due to uncertainty, but fiscal expansion policies such as consumption tax cuts will limit the decline, with a potential recovery to 55,000 points by year-end. Strong scenario (LDP secures a stable majority): If the LDP gains a stable majority of more than 244 seats, the Nikkei 225 index could immediately break through 56,000 points after the election and surge to above 60,000 points by year-end.

Exchange rate critical point: 165 yen is the key threshold. Yen depreciation is a double-edged sword for Japanese stocks. While it can boost the profits of export-oriented companies, excessive depreciation erodes the asset value of unhedged investors and hinders real wage growth.

Diminishing profit effect: The proportion of overseas production for Japanese companies has risen to over 20%, and they are no longer actively repatriating overseas earnings. This has caused the sensitivity (Beta) of Japanese corporate operating profits to the exchange rate to decline from 1.0x in fiscal 2016 to the current 0.6x. Asset impairment risk: For US dollar investors without currency hedging, yen depreciation directly leads to a shrinkage in the value of their holdings (Beta of -1x). When the profit benefits from currency depreciation can no longer offset the losses from asset impairment, foreign investors will tend to sell. Critical point calculation: JPMorgan calculates that a USD/JPY rate of 165 is the critical point where the momentum for stock market gains weakens. If the yen depreciates further to 170, concerns about the currency being out of control will intensify, potentially triggering a short-term correction. Furthermore, if the exchange rate exceeds 165, the goal of achieving positive real wage growth in Japan will become difficult to attain, thereby undermining the logic for a domestic demand recovery.

Interest rate警戒线: 10-year government bond yield at 3%. Rising interest rates put pressure on Japan's financial system and stock market valuations, with the impact on regional financial institutions being particularly noteworthy.

Regional bank pressure: JPMorgan estimates that if the 10-year JGB yield enters the 3.0%-3.5% range, the capital adequacy ratios of Japanese regional financial institutions could fall below the regulatory红线 of 8%. This would force these institutions to accelerate bond loss-cutting measures and sell stocks to replenish capital. Valuation comparison: The current dividend yield of the TOPIX index is approximately 2%, and the total yield including share buybacks exceeds 3%. Once the 10-year JGB yield breaks above 3%, the attractiveness of stocks relative to bonds will significantly decrease, triggering a rebalancing of asset allocations. Policy response: The Bank of Japan and the Ministry of Finance are expected to take action (such as pausing quantitative tightening QT, resuming bond purchases QE, or adjusting pension fund asset allocations) to极力avoid the yield breaking through the 3% psychological barrier too rapidly.

Fund flows: Short-term foreign selling pressure vs. medium-term domestic buying support. Fund flows are a key determinant of short-term market volatility but also provide the logic for medium-to-long-term support.

Short-term risk: Rising interest rates could trigger stock sales by regional banks, subsequently leading to follow-on outflows by foreign investors. This negative feedback loop in capital flows is the primary short-term downside risk for the market. Medium-term support: Japanese domestic institutional investors possess significant potential for capital repatriation. From the end of 2012 to the end of 2024, Japanese corporate pensions and public pension funds shifted 4 trillion yen and 147 trillion yen in assets, respectively, into foreign securities. As domestic yields rise (for instance, if the 10-year JGB yield exceeds the 2.14% assumed return for corporate pensions), this capital is expected to flow back into Japanese government bonds and stocks, acting as a stabilizer for the market.

Risk scenario analysis: If the "dual pressure" spirals out of control. JPMorgan provided quantitative forecasts for market performance under two scenarios:

Scenario one (moderate risk): USD/JPY reaches 160 by year-end, with the 10-year JGB yield at 2.5%. Under this scenario, driven by fiscal expansion and moderate earnings growth, the Nikkei 225 index is expected to reach 54,000 points by year-end.

Scenario two (high risk): USD/JPY depreciates to 170, and the 10-year JGB yield rises to 3.5%. In this case, although currency depreciation would provide about a 5% boost to EPS, the effects of valuation contraction (P/E decline) and asset impairment would dominate. The Nikkei 225 index is forecasted to face a correction of approximately 10%, falling to around 48,000 points.

Even if a high-risk scenario leads to a market correction, as long as structural positives such as corporate reform and moderate inflation increases remain unchanged, the Nikkei 225 index around the 48,000-point level would be viewed as an excellent buying opportunity.