Japanese stock valuations have expanded significantly Japanese stocks rebounded sharply from their April 2025 low, which followed the announcement of U.S. reciprocal tariffs. The market strengthened further following the Liberal Democratic Party's landslide victory in the Lower House election. This rally appears to reflect heightened expectations for the economic policies of the new Takaichi administration.
When viewed through the lens of the forward Price to Earnings (P/E) ratio, TOPIX valuations have reached levels that significantly exceed their historical range, excluding the COVID-19 pandemic period (Figure 1). Concerns about potential overvaluation have emerged among some market participants.
On the other hand, the forward P/E ratio for the S&P 500, a leading U.S. stock index, has recently settled above 20 times, significantly exceeding its historical range. This is primarily driven by the high P/E ratios of large-cap tech stocks, which are pushing up the P/E of the benchmark index. To some extent, these high P/E ratios are justified by the strong earnings growth of large-cap tech companies. This raises the question of whether such a substantial rise in the P/E ratio is also justified in Japan, as it is in the U.S.
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Written by Hitoshi Asaoka, Chief Strategist, Asset Management One Co., Ltd