Summary:
Japan stocks extend rally on snap election speculation
Nikkei breaks above 54,000 for first time
Markets price fiscal stimulus and stopgap budget risk
Yen weakens past 159, lowest since July 2024
FX jawboning fails to slow equity-yen dynamic
Japanese equities extended their rally on Wednesday, pushing further into record territory as speculation mounted that Prime Minister Sanae Takaichi may call a snap lower house election, reinforcing expectations of looser fiscal policy and prolonged yen weakness.
According to the Yomiuri newspaper, Takaichi is considering dissolving parliament next week and holding an election on February 8. If confirmed, it would mark her first time facing voters since taking office in October. The report said the fiscal 2026 budget would be unlikely to pass before the end of the current fiscal year in March, raising the prospect of a stopgap budget as the government moves to roll out inflation countermeasures as early as possible.
Markets have interpreted the prospect of an early election as fiscal-positive. Japanese stocks surged for a second straight session, with the Nikkei 225 rising as much as 1% on Wednesday to break above the 54,000 level for the first time, following a more than 3% gain the previous session. The broader Topix also extended record highs, adding around 0.6%.
The rally has been reinforced by a persistently weak currency. The yen slipped past 159 per dollar, marking its weakest level since July 2024, when Japanese authorities last intervened to halt rapid depreciation. The softer yen continues to support exporter earnings expectations, amplifying equity gains even as officials express concern over one-sided FX moves.
Recent verbal intervention from Japanese officials has so far failed to deliver a sustained yen rebound, and markets appear to be prioritising rate differentials and fiscal expectations over rhetoric. With no clear signal of imminent action from authorities, currency weakness remains a tailwind for stocks.
For investors, the emerging narrative is familiar: election-driven stimulus expectations, a soft yen, and resilient global risk appetite are combining to propel Japanese equities higher, even as FX stress builds in the background.
