The Hindu: Published on 23rd Oct 2025.
Why in News?
Global investors are showing renewed interest in Japan’s stock and debt markets following the election of Sanae Takaichi, Japan’s first female Prime Minister. Her government’s pro-stimulus economic approach has triggered optimism and record highs in Japan’s Nikkei index.
Background:
Japan has long struggled with economic stagnation, often referred to as its “lost decades.” Recently, global financial markets have been rallying due to interest rate cuts by the U.S. Federal Reserve. Amid this, Japan’s comparatively lower stock market valuations and new political leadership have drawn investors’ attention.
Key Issues:
Japan’s coalition government dynamics between the Liberal Democratic Party and Ishin create policy uncertainty.
The weakening yen poses a double-edged sword — good for exports but concerning for foreign investors.
Investors are cautious about the long-term sustainability of stimulative policies amid Japan’s high public debt.
Current Developments:
Foreign investors purchased nearly ¥4.36 trillion ($28.9 billion) worth of Japanese stocks in early October — the biggest inflow since 2005.
The “Takaichi trade” refers to investor optimism around her policies, focusing on tax cuts, infrastructure spending, and low interest rates.
Japan’s Nikkei index has hit record highs, while investors diversify away from the expensive U.S. and European markets.
Global Context:
The rally in global financial assets — including U.S., European, and Japanese stocks, gold, and bitcoin — reflects broader investor sentiment driven by monetary easing.
Comparatively, Japan’s stock market appears cheaper and more stable than the U.S. Nasdaq, which trades at higher P/E ratios.
Challenges Ahead:
Policy divergence within the coalition could limit Ms. Takaichi’s reform capacity.
Rising inflation and yen depreciation may force the Bank of Japan to tighten monetary policy earlier than expected.
Comparisons with Donald Trump and Liz Truss suggest potential volatility in leadership style and market reactions.
Impact / Significance:
- Short-term: Positive investor sentiment and increased inflows to Japan.
- Long-term: Dependent on political stability, fiscal discipline, and global interest rate trends.
- The development signifies Japan’s re-emergence as an attractive alternative to overheated Western markets.
