Japanese stocks have been hitting record highs. But the rally may be
Aerial view of Mt. Fuji, Tokyo Tower and modern skyscrapers in Tokyo on a sunny day.
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Japanese stocks have been hitting record highs on the back of renewed confidence in domestic politics and the ruling administration’s economic agenda, but experts warn of a disconnect between the stock market and economic fundamentals.
Japan’s Nikkei 225 has notched several firsts in recent days, crossing 56,000, then 57,000 and nearing 58,000, fueled by the so-called “Takaichi trade,” following Prime Minister Sanae Takaichi’s landslide victory in the Lower House.
Japan’s stock market, which is closed on Wednesday for a holiday, saw the Nikkei hit a high of 57,960 on Tuesday. The index is up about 15% so far this year.
Political optimism has become a key pillar of the rally that has been catalyzed by Takaichi’s strong electoral mandate, said market watchers. Stock investors have welcomed the prospect of higher spending, tax relief and a more assertive economic agenda.
However, analysts caution that enthusiasm may be running ahead of clarity on how those policies will be funded, and that Japan’s current equity market foundations look increasingly fragile: vulnerable to currency moves, global shocks and a growing gap between prices and fundamentals.
Richard Harris, chief executive officer at investment management firm Port Shelter, said the market’s current gains are difficult to justify purely on economic strength: “It’s not really driven by fundamentals. If you’re looking at how the currency is moving, how the economy is doing … there’s nothing really particularly strong on it to justify the move in the market.”
On a quarter-on-quarter basis, Japan’s economy shrank 0.4% in the three months to September, contracting for the first time in six quarters, government data released in November showed. It contracted 1.8% on an annualized basis.
The country is the most indebted nation in the world, with a debt-to-GDP ratio of almost 230% in 2025, data from the International Monetary Fund showed, and increased fiscal spending risks piling more debt.
The government in November approved a fiscal stimulus package of over $135 billion, warranting increased borrowing.
Harris said sentiment, liquidity and narrative were the dominant forces steering the market. “We’ve seen that in other markets too,” he said, adding that Japan was not unique in breaking records amid global enthusiasm for equities and AI-related investment.
AI and yen uncertainty
Moody’s senior economist Stefan Angrick echoed that the AI boom had lifted stocks globally, and that was visible in Japanese equities as well.
“The current situation probably looks a little bit fragile in the sense that valuations are driven by the global equities boom,” Angrick told CNBC.
Japan’s heavy exposure to global manufacturing and capital goods has made it a prime beneficiary of the AI build-out. But that linkage also leaves the market sensitive to any cooling in global tech enthusiasm, or to shifts in…
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