Japan’s stock market opened the week with a strong rally: the Nikkei 225 index climbed nearly 5%, marking its biggest surge in recent months. The optimism came after Sanae Takaichi’s victory in the ruling Liberal Democratic Party (LDP) leadership race. For investors, this signaled that Japan’s economic policy is likely to stay supportive and liquidity will remain abundant.

Market reaction

Markets reacted instantly, as Takaichi is known for favoring fiscal spending and moderate monetary policy. This reinforced expectations that Japan’s economy will continue to receive government support. The yen’s weakening following the political news also benefited exporters: a cheaper currency makes Japanese goods more competitive abroad.

Analysts note that not all sectors shared equally in the gains. Export-oriented companies showed the strongest growth, while domestic-focused firms were more restrained. This reflects a balance between optimism for reform and caution over how the new government will act in practice.

How investor sentiment has changed

For many market participants, Japan’s political shift became a symbol of change. They see the transition of power as a chance to refresh economic strategy and ease pressure on businesses. At the same time, several key factors continue to shape the outlook for the Nikkei:

• The Bank of Japan’s monetary policy and the possibility of further easing;
• The level of inflation and dependence on imported resources;
• The yen’s exchange rate against the dollar and the euro;
• The performance of major exporters, particularly in tech and automotive sectors;
• Expectations for corporate earnings by the end of the year.

This mix of domestic and global signals creates a complex picture: the market is trending upward but with a clear sense of caution. Investors are willing to take risks but expect concrete steps from the government to make the rally sustainable.

Possible risks and course adjustments

Despite the overall optimism, analysts warn of several potential threats. The new leadership has yet to reveal the details of its program, and some promises could face bureaucratic resistance. If delays or disagreements arise within the party, market sentiment could shift quickly. Among the main risks are:

• Rising prices for imported goods as the yen weakens;
• The possibility of higher inflation and slower real income growth;
• The global market’s reaction to Japan’s political changes;
• External pressure from trade and energy costs.

If these risks start materializing, the Nikkei’s growth could give way to a correction. However, for now, investors are using positive news as an opportunity to increase their positions — especially in technology and financial sectors.

What comes next

In the coming weeks, experts expect higher volatility in Japan’s stock market. If Takaichi’s government confirms its commitment to stimulate the economy and support businesses, the rally could continue and strengthen. But in case of uncertainty, some capital may flow back into safe havens like gold, the US dollar, and bonds.

The market is now at a turning point: political stability could become the start of a new growth cycle — or just a temporary pause. Everything will depend on whether the new LDP leader’s promises turn into concrete economic actions.

Investors are also watching the Bank of Japan closely: if monetary tightening exceeds expectations, some bullish positions may be reconsidered. Moreover, external factors — global interest rates, the state of the world economy, and the dollar’s performance — could further increase market volatility.