Japanese Markets: Record highs on stimulus expectations
Japanese equities have surged to historic highs following the election outcome. The Nikkei 225 rallied as much as 5–6% intraday and crossed the 57,000 mark for the first time, while the broader Topix index also hit record levels, reflecting strong investor optimism around increased government spending and tax cuts.
According to Reuters, markets are pricing in expectations of aggressive fiscal stimulus, including a proposed ¥21 trillion package and a two-year suspension of Japan’s 8% food consumption tax. Investors expect targeted spending in strategic sectors such as semiconductors, artificial intelligence, defense, and infrastructure, which have boosted technology, machinery, and defense-linked stocks.
At the same time, Japanese government bond (JGB) yields have risen sharply. Ten-year JGB yields climbed towards 2.28%, while longer-dated bonds also saw yields rise, reflecting market concerns over higher borrowing and Japan’s already elevated public debt burden.
Yen Outlook: Volatile with structural weakness bias
The Japanese yen has been highly volatile since the election. The yen initially weakened following Takaichi’s victory but later rebounded as rising bond yields and speculation about currency intervention supported the currency. According to market data, the dollar fell to around ¥155–156 per dollar after the results.
However, analysts caution that the broader policy direction — focused on fiscal expansion — could keep structural pressure on the yen. Increased government borrowing and slower monetary normalization by the Bank of Japan may widen interest-rate differentials with the U.S., making sustained yen strength difficult.
Japan’s FX reserves, estimated at around $1.4 trillion, have also come under scrutiny, as the government explores ways to fund tax cuts and stimulus without sharply increasing debt. Officials are debating whether surplus income from FX reserves could be used, raising longer-term concerns about fiscal sustainability and currency stability.
Global and U.S. Markets: Ris-on spillover
Takaichi’s decisive win has contributed to a broader risk-on tone across global markets. Asian equities outside Japan also moved higher, while U.S. stock indices advanced, supported by improved global sentiment and expectations of continued liquidity.
For U.S. markets, key transmission channels include:
Capital flows: Rising Japanese yields could eventually influence demand for U.S. Treasuries
Dollar dynamics: Yen weakness typically supports a stronger dollar, affecting global liquidity and emerging market flows
Sector impact: U.S. technology, defense, and semiconductor firms may benefit from increased Japanese investment and strategic cooperation
The Bigger Picture: Growth versus fiscal risks
Takaichi’s strong mandate has reduced near-term political risk in Japan, which is supportive for equities and global risk assets. ING and other global banks, quoted by The Guardian, note that the scale of the mandate increases the likelihood of sustained fiscal expansion, boosting public investment and private-sector capital expenditure.
However, longer-term concerns remain. According to Reuters data, Japan already has one of the highest public debt levels among developed economies, and rising bond yields reflect investor unease about how expanded stimulus and tax cuts will be funded.
Key Takeaways
Sanae Takaichi’s victory is being interpreted by markets as a clear green light for growth-oriented and expansionary policies. In the near term, this supports Japanese equities, improves global risk sentiment, and keeps the yen volatile with a bias toward weakness. For global and U.S. markets, Japan’s renewed stimulus push adds support to the risk trade — but also raises important questions about debt sustainability, bond yields, and long-term currency stability.