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After more than 30 years of stagnation, Japanese stocks are rallying.

This latest rally comes off the back of Prime Minister Sanae Takaichi鈥檚 election victory, as investors believe she has a clear vision for boosting the economy.

It’s this confidence that has pushed Japanese shares to highs they haven’t seen since the late 1980s.

The Election Result Showed Markets They Had A Clear Direction

According to multiple outlets, one of the biggest triggers for the rally is the scale of Takaichi鈥檚 win.

Her party secured a landslide victory, now holding a two thirds majority in parliament. This gives her a lot more power to push through policies without having to battle the opposition.

For investors, this is important. Markets like economies that have a clear direction. Before any election, markets get shaky when they think an economy could end up with strong oppositions fighting each other. But once a result like this comes out, the reaction is instant. In fact, soon after the election, Japan鈥檚 main stock index, the Nikkei 225, jumped to its highest level on record.

Investors Are Optimistic About Takaichi鈥檚 Growth Policies

At the heart of the rally is the optimism that Takaichi’s economic policies will be designed to stimulate growth.

Many have called this the 鈥淭akaichi trade鈥�, which is an economic philosophy based on increased government investment and support for low interest rates to cut government debt.

As part of her election campaign, she has been vocal about using government funds and investment principles to drive Japan out of stagnation. Since taking office, she has already pledged investment in areas like defence and AI.

Almost immediately, the markets responded, with shares in Japanese defence firms rising. For example, Kawasaki Heavy Industries, a Japanese defence giant, jumped more than 15%. (NY Times)

A Weaker Yen Is Also Helping

Another reason why stocks are on the up is because the Yen, Japan’s main form of currency, is dropping.

At times when interest rates are looking to decrease and government spending is looking to increase, currency usually drops. This is because holding cash in savings accounts with low interest rates becomes less appealing, whilst investments, which return higher yields on average, become more appealing.

For Japanese companies, this weakened Yen means their products become cheaper for overseas buyers. More affordability = more sales. Especially for companies selling exports like cars and electronics.

This rise in sales also contributes to a stock rally, as companies lock in more profits.

Debt Is Also A Consideration

But not everything is looking rosy. One of Japan’s biggest issues is that it has a lot of government debt, and some worry that this promised increase in spending could put a strain on finances.

For investors however, growth is more important than debt, and many believe that a stronger economy will offset this spending over the longer term.

Diversification Is Driving More Investors To Japan

But whilst increased government spending, new policies, a weakened Yen and a investor confidence helps, so has the global economy.

The US, in particular, is increasingly being seen as a riskier bet, despite being seen as a ‘safe bet’ for many years. As some investors look to diversify away from US stocks, Japan provides an option that is big, stable and well positioned to benefit from an economic boom.

Will The Rally Continue?

Whether Japan’s stock market will keep rising depends on what happens next.

Investors will be watching closely to see how Takaichi鈥檚 government will act, and whether her promises really lead to the economic growth they promised.

For now? Investors are optimistic.

Will it last? Well that’s the golden question, and only time will tell.