Japan Stocks Hit Record Highs, Bonds Plunge on Election Hopes
Overview
Japanese equities surged to record intraday highs Tuesday, with the Nikkei 225 and Topix benchmarks climbing sharply. Government bonds slumped as speculation intensified that Prime Minister Sanae Takaichi may call a snap election. The yen remained weak, hovering near multi-year lows, though exporters and tech sectors benefited from currency depreciation. Financial firms also saw gains as bond yields rose.
Political Catalyst
Japanese stocks rallied sharply and government bonds plummeted on Tuesday amid fervent speculation that Prime Minister Sanae Takaichi might be preparing to call a snap election. Takaichi's elevated popularity is seen as a strong indicator of a potential victory for the Liberal Democratic Party (LDP), which could solidify her authority and reignite the so-called "Takaichi trade."
Market Reaction
The Nikkei 225 and Topix benchmarks both soared to fresh all-time intraday highs, with the former advancing as much as 3.6% and the latter 2.4%. Conversely, Japanese Government Bonds (JGBs) faced significant pressure. The yield on the 30-year JGB surged by up to 12 basis points to 3.52%, reflecting increased government borrowing expectations and potential fiscal expansion.
The yen experienced a brief, minor uptick early Tuesday after Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent discussed concerns over the weakening currency. However, the currency remained under pressure, trading around 158 to the dollar.
Sectoral Beneficiaries
Analysts at Citi Research anticipate significant gains in sectors poised to benefit from Takaichi's potential spending plans. These include defense and nuclear power. Forex-sensitive exporters, such as automakers, also stand to gain from a weaker yen. Defense contractors like Kawasaki Heavy Industries Ltd. and IHI Corp. were among the Nikkei's top performers, each rising over 5%. Nuclear plant engineering firm Toyo Engineering Corp. saw gains as high as 15%.
Automaker Toyota Motor Corp. shares climbed as much as 5.2%, and Hitachi Ltd. was up 3.8%. Technology-related stocks, including Advantest Corp., Tokyo Electron Ltd., Lasertec Corp., and Fuji Electric Co., also outperformed, aligning with Takaichi's focus on boosting Japan's AI and chip sectors.
Financial Sector and Global Capital
Rising long-term JGB yields provide a tailwind for financial firms. Megabank Mitsubishi UFJ Financial Group Inc. advanced as much as 3.8% to a new all-time high. The demand for Japanese equities was further supported by an emerging "Sell America" trend, driven by growing concerns over Federal Reserve independence and geopolitical tensions in the U.S.
Bloomberg Strategists' View
Market strategists noted the significant yield dispersion at the long end of the Japanese bond curve, suggesting that Bank of Japan intervention might be necessary. Talk of early Japanese elections is expected to further undermine sentiment in JGBs, as the government's priority would likely be boosting stocks ahead of any vote.
