Nikkei’s record run: How Takaichi’s fiscal plans reshaped Asia’s trading day

Japan’s equity market seized the regional spotlight on Monday as the Nikkei 225 vaulted to an all-time high and the Topix surged after Sanae Takaichi’s victory in the Liberal Democratic Party leadership race fuelled expectations of larger fiscal spending and a patient Bank of Japan. The Nikkei jumped about 5 percent to close near 48,051, while the Topix added roughly 3.3 percent, with traders rotating into export-heavy blue chips as the yen slid toward the psychologically important ¥150 level against the U.S. dollar.

The rally carried a distinctly policy-driven tone. Markets were effectively pricing in an “Abenomics 2.0” revival, wagering that a Takaichi government will prioritise growth through strategic spending on technology, defence, and energy while avoiding an abrupt tightening of monetary policy. That view was visible in sector leadership: defence and industrials roared, with Mitsubishi Heavy Industries rising nearly 12 percent and Japan Steel Works up about 14 percent, even as the 40-year Japanese government bond yield climbed to 3.54 percent.

Why did Japanese stocks rally to record highs, and how did the yen’s slide amplify gains for exporters and Nikkei heavyweights?

A weaker yen translates directly into higher profits for exporters when overseas earnings are converted back to yen. That made Monday’s currency move crucial. The yen’s near-2 percent slide against the dollar — its sharpest in months — immediately boosted valuations for global manufacturers such as Toyota Motor Corporation (TYO: 7203), Sony Group Corporation (TYO: 6758), Fast Retailing Co. Ltd. (TYO: 9983), SoftBank Group Corp. (TYO: 9984) and Tokyo Electron Limited (TYO: 8035).

As rate-hike expectations faded, investors rotated into risk assets. The shift echoed Japan’s post-Abenomics playbook: a weaker yen, accommodative central-bank stance, and stimulus-driven corporate earnings surge. With long-end yields steepening but the short end anchored, equities enjoyed the ideal “reflation without panic” backdrop that last appeared during the late-2023 rally.

Behind the rally also lay Japan’s broader industrial revival. Over the past two years, the government has invested heavily in semiconductor supply chains, defence systems, and green-energy transition technologies. The Takaichi mandate reinforced that continuity, signalling that fiscal stimulus — not austerity — remains the dominant narrative.

How did Takaichi’s victory reshape interest-rate expectations, and why are bond traders and currency desks driving the equity narrative?

The bond–FX–equity feedback loop dominated Monday’s trading screens. In currency markets, the yen’s tumble reflected growing conviction that the Bank of Japan will delay any additional rate hike. Swaps now price less than a 40 percent chance of a move this year, down sharply from nearly 70 percent before the vote.

Long-term bonds, however, sold off. The 40-year JGB yield hit 3.54 percent — its highest in years — as traders weighed the fiscal cost of new stimulus. The resulting steepening of the yield curve normally benefits banks, but only up to a point. If the move signals growing debt risk rather than healthy inflation expectations, it can rattle financials and insurers.

Equity investors chose to see the glass half-full. A slow-moving central bank and a government committed to growth spending make for a powerful equity cocktail. As one Tokyo strategist put it, the market is “pricing hope, not discipline.” That hope is visible in corporate profit upgrades, higher dividends, and a growing foreign-investor footprint in Japanese equities since 2023.

How did Japan’s surge reshape Asia’s trading session, and what does it mean for regional leadership in Q4 2025?

Across Asia, Japan’s shock rally became the defining story of the day. Most regional indices opened higher in sympathy but later diverged. Hong Kong’s Hang Seng slipped into the red by afternoon, while South Korea’s KOSPI eked out modest gains. Markets in mainland China and parts of Southeast Asia were subdued due to holidays, leaving Tokyo as the clear outperformer.

The significance lies in leadership rotation. For much of 2024, global funds chased South Korea’s semiconductor exposure or India’s consumption theme. Monday’s price action flipped that hierarchy: Japan reclaimed the role of Asia’s bellwether. Portfolio managers benchmarked to Asia-ex-Japan indices now face pressure to re-weight Tokyo exposure or risk underperformance.

U.S. and European futures also benefited. Global risk sentiment improved, safe-haven assets softened, and cross-asset volatility declined — all consistent with markets reading Takaichi’s win as stabilising, not disruptive.

What are investors betting a Takaichi government will deliver on fiscal spending, and how do policy priorities link to Japan’s industrial strategy?

Takaichi campaigned on “strategic spending” — a phrase investors interpret as targeted fiscal activism. The priority list includes artificial intelligence, semiconductor production, nuclear-energy components, and defence capabilities. Her platform echoes late Prime Minister Shinzo Abe’s belief that national security and economic strength are intertwined.

That positioning explains the outsized moves in industrial stocks tied to Japan’s supply-chain resilience push. For firms such as Mitsubishi Heavy Industries and Japan Steel Works, government contracts could expand significantly if fiscal budgets tilt toward domestic manufacturing and energy self-reliance.

Meanwhile, in technology, Tokyo Electron and chip-equipment peers stand to benefit from Japan’s partnership with U.S. and Taiwanese foundries. A pro-investment fiscal stance ensures that subsidies, tax incentives, and R&D grants continue to flow to semiconductor clusters in Kumamoto and Ibaraki.

The policy intent is clear: use government spending to pull private investment, keep inflation expectations anchored near two percent, and solidify Japan’s technological competitiveness across critical sectors.

How should investors interpret sentiment in Japanese blue chips, and which buy–sell–hold approaches make sense in this currency-driven market?

Investor sentiment on Japan is unambiguously bullish for export-oriented companies. With the yen weakening and equity risk appetite rebounding, short-term traders see a “buy-the-breakout” opportunity in names with global earnings leverage. Toyota, Sony, and Tokyo Electron rank high on that list.

For domestic financials, the picture is more nuanced. Steeper yield curves can aid banks through wider net-interest margins, yet volatility in long-term bonds complicates hedging. Life insurers such as Dai-ichi Life or T&D Holdings face mark-to-market pressures if yields keep rising. The consensus view leans “hold” until the yield curve stabilises.

Institutional flows indicate that macro hedge funds and systematic strategies drove the initial leg of Monday’s surge. Real-money investors — pension and mutual funds — are likely to follow if cabinet appointments confirm fiscal discipline alongside stimulus.

Foreign investor participation remains the swing factor. Overseas funds have been net buyers of Japanese equities for seven of the last nine weeks, encouraged by stable inflation, corporate governance reforms, and an undervalued yen. A sustained uptrend could attract incremental inflows from passive vehicles tracking the Nikkei 225 and Topix.

What risks could derail Japan’s breakout, and what will determine whether the Nikkei can sustain its record run into 2026?

Despite the euphoria, risks abound. The foremost is policy execution. Campaign promises rarely translate smoothly into legislative action. Fiscal stimulus without a credible funding path could unsettle bond markets and reverse the sentiment shift.

The second risk is currency intervention. If the yen’s fall accelerates past ¥150, Japan’s Ministry of Finance may step in verbally or directly, capping the export-benefit narrative. A sudden reversal in the yen would squeeze hedged equity positions and hit short-term speculators.

The third is global macro volatility. Any slowdown in the United States or renewed energy-price shock could sap risk appetite across Asia. Japan’s heavy industrial exporters remain cyclical plays that thrive on global trade momentum.

Even so, the underlying structural story remains intact. Corporate reforms have improved transparency, dividend payout ratios are rising, and return-on-equity targets have become board-level priorities. If Takaichi’s policies reinforce that framework, Japan’s rally could evolve from tactical to structural.

Can Abenomics 2.0 sustain investor enthusiasm, and where does the smart money hide on pullbacks?

In expert circles, the consensus is that Japan’s new phase of reflation will be milder but longer-lasting than Abe’s original wave. The country’s demographics, corporate governance, and global positioning have shifted materially since 2012.

From a strategy standpoint, investors favour buy-on-dips exposure to export-linked blue chips, particularly where free cash flow and pricing power are robust. For insurance and banking, the stance remains neutral, awaiting clearer yield-curve signals. Domestic consumption plays could become attractive if fiscal stimulus filters into wages and consumer credit expansion.

The “Japan leads Asia” thesis would falter only if two shocks converge: a hawkish Bank of Japan that reverses policy expectations and a bond-market revolt that lifts funding costs. Barring that scenario, Tokyo looks poised to remain the region’s momentum leader through early 2026.

How today’s move fits into Japan’s reform-plus-reflation journey

Monday’s record-setting rally is less an anomaly than a continuation of Japan’s decade-long reform cycle. Corporate governance improvements, a cultural shift toward shareholder returns, and a steady inflation target have turned once-dormant markets into global favourites.

Sanae Takaichi’s win provided a catalyst — the political confirmation that stimulus and innovation will stay at the centre of policy. For global investors weary of volatile emerging markets, Japan now offers a blend of liquidity, growth visibility, and institutional predictability. The Nikkei’s new peak, therefore, is not just a headline; it is a signal that the world’s third-largest economy is reclaiming its relevance in the global investment narrative.