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Japan’s stock markets have been on a tear this year, and a fresh jolt of optimism has sent the Nikkei 225 to record highs after Sanae Takaichi’s victory to lead the ruling Liberal Democratic Party.
On Tuesday, the Nikkei 225 gained as much as 1.2% to over 48,500 in its second straight day of historic highs as traders piled in on the “Takaichi trade” — a wager on stronger stocks, rising bond yields, and a weaker yen that boosts exporters and corporate profits.
Traders are betting that Takaichi’s pro-growth, pro-fiscal stance could revive the spirit of Abenomics and a new wave of stimulus.
However, that optimism may be misplaced due to structural limits and political constraints, analysts said.
“If the Takaichi administration’s economic approach is merely an extension of Abenomics, it could be short-lived,” wrote Naka Matsuzawa, Nomura’s chief macro strategist, on Monday.
Abenomics nostalgia vs 2025 economic reality
The caution is because Japan’s economic backdrop is different than the early years under former Japanese prime minister Shinzo Abe, who started his second term in 2012. He stepped down in 2020.
Then, the dollar was trading at 80 against the Japanese yen and inflation was negative. However, consumer inflation is now running at around 3%, and the dollar is trading at around the 150 level against the yen, which restricts both fiscal and monetary space for expansion.
Analysts at Goldman Sachs wrote in a Sunday note that Takaichi “has consistently stated her support for a strategic, proactive fiscal policy.” But the analysts said she has also indicated her intention to respect the current policy stance of the coalition government, which includes removing a consumption tax from her platform and financing inflation countermeasures.
“We therefore believe it is unlikely she will immediately adopt large-scale fiscal expansion policies,” Goldman’s analysts wrote.
They wrote that they expect Takaichi’s victory not to impact the Bank of Japan’s monetary policy, with the next rate hike still expected in January.
The analysts’ measured assessments come as the market grapples with Japan’s stock market, which has entered overdrive mode in 2025 after several years of steady gains.
The Nikkei 225 has jumped about 20% this year, repeatedly breaking records thanks to global and domestic factors.
A weak yen has made Japanese assets cheaper for foreign investors. The country’s semiconductor, robotics, and automation firms are also riding the global AI boom, giving Japan’s market its hottest streak in decades.
While the market is pricing in Abenomics 2.0 — which could send Japanese equities soaring even further — “Sanae cannot replicate Abenomics,” wrote Rory Green, an economist at GlobalData.TS Lombard, on Monday.
There could be further complications arising from Takaichi’s stance on Japan’s monetary policy, which started hiking interest rates last year after two decades of ultra-loose monetary policy.
“The election of a politician who has described rate hikes as ‘stupid’ complicates an already tricky picture for the BOJ,” wrote Green.
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