Nikkei Hits Record, But Japan Rally Considered Vulnerable
Japanese stocks have hit record highs again in recent days, driven by political optimism following Prime Minister Sanae Takaichi's landslide victory and expectations of a more aggressive economic agenda. The Nikkei 225 index broke through new psychological levels, surpassing 56,000, 57,000, and even approaching 58,000—in a rally often referred to by the market as the “Takaichi trade.”
However, some observers believe this rally is potentially fragile due to the growing gap between surging stock prices and economic fundamentals. On Tuesday, the Nikkei briefly touched 57,960, and the index is said to have risen around 15% year-to-date. However, some analysts believe this strengthening is driven more by sentiment, liquidity, and policy narratives, rather than solid economic data.
The main catalyst is the belief that a strong political mandate will open the way for larger fiscal spending, tax breaks, and investment—particularly in sectors considered strategic. Markets naturally favor political certainty, especially when accompanied by the prospect of stimulus and a pro-growth agenda.
However, this euphoria is believed to be more likely to fade than clarity regarding the "costs" and funding sources of the policy. Japan is under pressure due to its extremely high government debt burden, so fiscal expansion risks amplifying bond market concerns and triggering exchange rate volatility—two factors that could quickly shake stocks if market direction changes.
Data-wise, the Japanese economy showed signs of weakening in mid-2025: real GDP in the July–September 2025 quarter fell 0.4% (qoq) or -1.8% annualized, the first contraction in six quarters. This means that the macroeconomic fundamentals have not fully strengthened despite the market's aggressive movements. (asd)
Source: Newsmaker.id
