Bets on Snap Election Push Japanese Stocks to Record High

Reports that the Japanese government could call a snap election next month lifted the Nikkei share average to a record high on Tuesday.

But the yen fell to an all-time low against the euro and other currencies, as investors bet that more fiscal stimulus would be splashed.

Japanese government bonds also tumbled, pushing up yields on 20-year paper to a record peak as local media said Prime Minister Sanae Takaichi plans to dissolve parliament when it reconvenes on January 23, setting the stage for a general election as soon as February 8.

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The Nikkei jumped as much as 3.6% to a record 53,814.79, and hovered near that level throughout the session. The broader Topix rose as much as 2.4% to 3,599.31, also an all-time peak.

A public holiday on Monday augmented the buying, as Japanese equities caught up with Wall Street’s two-day rally to record highs.

Equity market sentiment was also supported by a rapid decline in the yen since the end of last week, as a softer currency increases the value of overseas earnings at Japan’s heavyweight exporters.

The yen tumbled to an unprecedented 185.28 per euro and 199.12 per Swiss franc on Tuesday, and dropped to a 1-1/2-year low of 158.925 per US dollar.

“It’s widely believed in markets that if Takaichi dissolves parliament, the result will be a weaker yen, higher equities and lower bond prices,” based on the idea that “early elections mean proactive fiscal spending,” said Maki Sawada, an equities strategist at Nomura Securities.

Yields on the longest-dated JGBs jumped on Tuesday, with the 20-year yield spiking 8 basis points (bps) to hit an unprecedented 3.135%, and 30-year yields surging 12 bps to match a record peak of 3.52% seen last week.

So-called ‘super-long’ bonds are most sensitive to the fiscal outlook. Yields rise when bond prices fall. The 10-year yield climbed 6 bps to a 27-year high of 2.15%.

On Sunday, the head of coalition partner Ishin told national broadcaster NHK that he met with Takaichi on Friday and left with the impression an imminent election was a possibility.

Strong approval ratings

It would be the first time for Takaichi to face voters, giving her a chance to capitalise on the strong public approval ratings she has enjoyed since taking office in October.

“If concerns about fiscal expansion grow during the campaign, long-term yields could tend to come under upward pressure, at least temporarily,” Barclays economists Naohiko Baba and Takashi Onoda said.

“That said, a weaker JPY and rising long-term yields could end up restraining the Takaichi administration’s proactive fiscal policy.”

Transport equipment, which includes automakers and their suppliers, was the best performer among the Tokyo Stock Exchange’s 33 industry groups on Tuesday, with a nearly 5% jump.

Toyota Motor surged 7.1% and Subaru gained 4.2%.

On the Nikkei, semiconductor-sector shares outperformed. Chip-testing equipment maker Advantest soared 8.4% and chip-making tool manufacturer Tokyo Electron vaulted 8.1%.

Of the Nikkei’s 225 components, 187 advanced, 37 declined and one traded flat.

Takaichi meets South Korea’s Lee

Takaichi and South Korean President Lee Jae Myung met in Japan on Tuesday as the two East Asian neighbours look to bolster security and economic cooperation.

The two leaders are widely expected to discuss denuclearisation of the Korean peninsula, the fate of Japanese nationals abducted by North Korea and cooperation in areas such as artificial intelligence and semiconductors.

“We would like to make this a year in which Japan–South Korea relations are taken to even greater heights,” Takaichi told Lee at the start of their summit.

The meeting in Nara, Takaichi’s home prefecture, comes a week after Lee met Chinese President Xi Jinping. Tokyo and Beijing remain locked in a diplomatic dispute following remarks by Takaichi that Japan could deploy its forces if a Chinese attack on Taiwan posed an existential threat.

China regards Taiwan as part of its territory, a claim the self-governing island rejects.

Lee, who will spend two days in Japan, said earlier that while the diplomatic stand-off was not desirable for regional peace, he would not intervene in the dispute.

“In the current complex and dizzying international order, cooperation between South Korea and Japan is more important than ever,” he told Takaichi.

Takaichi and Lee will deliver a joint statement after their summit.