Japan's stock market is expected to extend its rally if the next government continues efforts to boost economic growth and prevent the country from returning to deflation, investment managers at Fidelity International said on Thursday.

The benchmark Nikkei 225 index reached a record high of 48,580.44 on October 9, surpassing the 1989 Japanese economic bubble-era peak, as political parties vied for influence ahead of a parliamentary vote next week to elect the country's next leader.

Whether the market maintained its momentum hinged on whether the government would "continue the growth strategy [it had pursued] for the last decade", rather than on who held the leadership position, said Miyuki Kashima, head of investments Japan at Fidelity.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

During Japan's so-called "lost decades" of stagnation and deflation, coupled with rising unemployment and hiring cuts, between the 1990s and 2010s, the government rolled out monetary and fiscal stimulus measures to battle slowing growth.

Japan's benchmark Nikkei 225 index has reached record highs above 48,000 this month. Photo: AFP alt=Japan's benchmark Nikkei 225 index has reached record highs above 48,000 this month. Photo: AFP>

Kashima said it would be inconceivable for any new ruling coalition to reverse course and allow Japan to fall back into old deflationary patterns.

Japan's economy is experiencing inflation. The economy was likely to continue to grow, with deflation having ended, according to Kashima. Companies were "investing, not holding up all the cash, which starts to create a positive spiral in the economy".

The positive spiral "in terms of earnings and wages ... is very likely to continue", Kashima said. "Perhaps in a more fragmented world ... Japan is going to be less affected than many other developed economies. That gives Japan a modest advantage."

The Topix index, which closed at 3,203.42 on Thursday, has gained 15 per cent this year.

The current wave of rising stock prices was not a bubble but the beginning of a structural transformation driven by strong corporate earnings and the country's reforms, both Kashima and portfolio manager Zeng Min agreed.

"Over the past few years, undervalued domestic sectors have been growing earnings above market that have become an increasingly important area of opportunities," Zeng said.

The growth potential going forward for Japanese companies, which bucked the deflation trend to achieve some of the highest earnings growth among developed markets over the past decade, was now very much likely better with the tailwind of mild inflation, Zeng said.

The rising 10-year Japan bond yield improved banks' valuations, he said. With the Bank of Japan's policy rate at only 0.25 per cent and inflation running at around 2-3 per cent, there was significant room for policy rates to rise, Zeng added.

The political uncertainty in Japan is adding to market concerns. The country's principal opposition factions are hoping to field a unified candidate for prime minister as they aim to break the Liberal Democratic Party's 13-year grip on power.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2025 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2025. South China Morning Post Publishers Ltd. All rights reserved.