Investing.com -- Japanese stocks have been on the ropes recently as investors fear that Shigeru Ishiba's ascension to Japan's top political position is bad news for stocks, but Citi suggests buying the dip as history shows this typical political shock doesn't have staying power.
"We forecast that Japan equities will pick themselves up as we head toward the year-end," analysts at Citi said Monday following the recent wobble in Japanese stocks after the election of Ishiba as the Japanese Prime Minister.
Ishiba was elected leader of Japan’s ruling Liberal Democratic Party indicated that he intends to dissolve the Lower House via a vote on Oct. 27, sparking a pullback in Japanese equities as investors view Ishiba "negatively for equities," the analysts said.
But history shows that wobbles in Japanese stocks during dissolution tend to be short-lived.
"Japanese equities tend to trend upward for two to three months after a dissolution, and this tendency has been intensifying since the beginning of the 2000s," analysts at Citi said in Monday note.
The market reaction to Ishiba's election win is reminiscent of what happened when PM Kishida took office, Citi says, recalling the more than 7% correction that ensued due to “Kishida shock” in the week following his victory.
Similarly, the pullback due to the “Ishiba shock” could take TOPIX down to the 2,500-2,550 range, with the Nikkei 225 around 36,000, Citi estimated.
While Ishiba's proposed policy measures -- including the possibility of hikes to income taxes on capital and corporate tax -- are less market-friendly, expectations that he will likely keep the same personnel in key cabinet positions suggest there is little chance of departures from the policies of his predecessor's Kishida administration.
"We think there is little chance of the government turning to negative economic policies to the extent the market appears to envisage," Citi said.
But Citi believes the "Ishiba shock" will be short-lived as there is "little chance of drastic changes to the economic policies that were pursued by the Kishida administration."
The bank points to several factors supporting this view, including Ishiba's lack of experience in major economic portfolios and his recent indications that he plans to pursue the economic policies of the Kishida administration.
Japanese equities have plenty of ammunition to mount a rebound toward year-end, Citi says, supported by "potential upward revisions to company plans at the half-year mark and the tendency for Japanese equities to rally when the Federal Reserve enters a rate-cutting cycle."