Japan’s equity markets surged following Sanae Takaichi’s election victory. As a successor to Shinzo Abe’s “Three Arrows” economic philosophy, the new prime minister is expected to maintain a market-friendly stance. Could the Nikkei 225 be poised for new record highs? Let’s discuss it and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Investor sentiment in Japan’s equity market is optimistic.
- Fiscal stimulus and ultra-low interest rates support the Nikkei 225.
- Asian stock indices continue to outperform their U.S. peers.
- Long positions on the Nikkei 225 remain relevant, with targets at 50,700 and 52,600.
Quarterly Fundamental Forecast for Nikkei 225
Is Abenomics making a comeback? Investors see parallels with the past: the victory of a market-friendly candidate, the return of influential advisors such as Etsuro Honda — a former Shinzo Abe economic aide now advising Takaichi — and the new administration’s willingness to pressure the Bank of Japan. Even Japan’s economic weakness adds to the comparison: according to Bloomberg forecasts, GDP is expected to shrink by 1.2% in Q3 due to U.S. tariffs. Unsurprisingly, the Nikkei 225 jumped 4.8% following the news of Takaichi’s election as LDP leader.
Japan’s Economic Performance
Source: Bloomberg.
There are, however, two key differences suggesting that “Abenomics 2.0” is unlikely. First, the Liberal Democratic Party’s position is weaker today than during Abe’s tenure. Unless Takaichi secures cooperation with the Komeito party, she will have to make compromises with the opposition. Second, Japan is no longer fighting deflation: consumer prices have exceeded the 2% target for more than three years.
Abe’s “Three Arrows” policy was a brilliant marketing success that drew foreign capital into Japan’s stock market. Expectations of a repeat performance have already driven record foreign inflows of ¥2.48 trillion into Japanese equities in the week ending October 3. Major banks and investment houses are now revising their year-end forecasts for the Nikkei 225 higher: Nomura Securities and Daiwa Securities project 49,000, SMBC Nikko Securities forecasts 47,000, and Julius Baer targets 50,000.
Nikkei 225 Forecast and Performance
Source: Bloomberg.
Even before Takaichi’s victory, two-thirds of Bloomberg-surveyed analysts expected Asian equity benchmarks to outperform U.S. markets in 2025, citing lower valuations and stronger earnings prospects. By the time of the survey, the MSCI Asia Pacific Index had gained 22%, compared with 14% for the S&P 500.
In my view, Japan holds an advantage over the U.S. Both countries have market-friendly governments, but Tokyo’s near-zero interest rates allow fiscal support, while Washington is forced to tighten its belt. Otherwise, debt-servicing costs — already exceeding $1 trillion — would rise even further, exceeding what the U.S. spends on Medicare or defense.
The U.S. may have artificial intelligence as its growth engine, but if AI profits take longer to materialize, the S&P 500 could face a correction. Japanese equities, meanwhile, will likely benefit from lower valuations and continued foreign inflows.
Trading Plan for Nikkei 225 for the Quarter
Under these conditions, the upward trend in the Nikkei 225 will likely continue. The trend is your friend — follow it. Traders already holding long positions have little reason for concern; those who missed the rally can use the current pullback as a buying opportunity, targeting 50,700 and 52,600.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of NI225 in real time mode
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