Aerial view of Mt. Fuji, Tokyo Tower and modern skyscrapers in Tokyo on a sunny day.
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Japanese stocks are hitting record highs on the back of renewed confidence in domestic politics and the ruling government’s economic policies, but experts are warning of a disconnect between the stock market and economic fundamentals.
Japanese Nikkei Stock Average Buoyed by the so-called “Takaichi trade” following Prime Minister Sanae Takaichi’s landslide victory in the House of Representatives, the number has exceeded 56,000, surpassed 57,000 and is approaching 58,000 in recent days.
In Japan’s stock market, which is closed on Wednesday due to a public holiday, the Nikkei Stock Average hit a high of 57,960 yen on Tuesday. The index is up about 15% since the beginning of the year.
Market sources said political optimism was a key pillar of the rally, fueled by Takaichi’s strong electoral mandate. Stock investors are welcoming the prospect of higher spending, lower taxes and more aggressive economic policy.
But analysts warn that enthusiasm may be outpacing clarity on how such policies will be financed, and that the current foundations of Japan’s stock market appear increasingly vulnerable to currency fluctuations, global shocks and a widening divergence between prices and fundamentals.
Richard Harris, CEO of investment management firm Port Shelter, said the market’s current rally is difficult to justify purely on economic strength. “It’s not really driven by fundamentals. If you look at currency movements and the state of the economy… there’s nothing particularly strong that would justify the market movement.”
According to government statistics released in November, Japan’s economy contracted by 0.4% from the previous quarter in the three months to September, the first contraction in six quarters. At an annualized rate, it shrunk by 1.8%.
The country is the most indebted country in the world, with a debt-to-GDP ratio of almost 230% in 2025, according to International Monetary Fund data, and increased government spending risks accumulating even more debt.
In November, the government approved more than $135 billion in fiscal stimulus to justify increased borrowing.
Harris said emotion, liquidity and narrative are the dominant forces driving markets. “Similar things are happening in other markets,” he said, adding that Japan is not alone in breaking records amid global enthusiasm for stocks and AI-related investments.
AI and Yen Uncertainty
Moody’s senior economist Stephan Anrik agreed that the AI boom is boosting stock prices globally, and that is also reflected in Japanese stocks.
“The current situation probably looks a little fragile in the sense that valuations are being driven by the global equity boom,” Anrik told CNBC.
Japan is the biggest beneficiary of AI buildouts because of its large exposure to global manufacturing and capital goods. But that connection also makes the market sensitive to a cooling global tech frenzy and fluctuations in currencies that have been quietly doing much of the hard work, he said.
That sensitivity has become even more apparent in recent months, as concerns about an AI bubble have destabilized markets, including Japanese stocks. The software sector fell last week after artificial intelligence company Anthropic released new AI tools designed to handle complex professional workflows that many software companies offer as core services.
What’s also making the current valuation level a bit unstable is the yen, Anric added. The yen has depreciated significantly over the past year, which tends to be positive for Japanese stocks, given that a significant portion of the market is made up of export-dependent manufacturers.
A weaker yen boosts profits and boosts stock valuations, but the effects may wane over time. “The yen is trading in a way that is far removed from its fundamentals. Fundamentally, the yen is too weak. It’s unreasonably cheap,” he said.
The Japanese yen has depreciated by about 3.67% against the dollar over the past six months, according to LSEG data.
Japan has indicated it may intervene if the yen continues to weaken, with Japanese Finance Minister Satsuki Katayama conveying concerns to U.S. Treasury Secretary Scott Bessent about a “unilateral yen depreciation.”
Aberdeen Investments expects the yen to appreciate as real interest rates rise moderately, as inflation is expected to be slower than currently.
Anrik also expects the currency to appreciate. “Over the medium term, we expect the yen to appreciate and stock valuations to decline slightly,” he said, adding that currency normalization “could take away a significant portion of current stock prices.”
However, this does not mean that Japan’s stock market boom is lacking.
Experts point out that recent structural reforms, particularly around corporate governance, capital efficiency, and shareholder returns, have led to sustained growth. Companies are ramping up share buybacks, eliminating cross-shareholdings and focusing more aggressively on return on equity, a move encouraged by the Tokyo Stock Exchange.
Some asset managers argue that Japan’s corporate fundamentals remain broadly supportive, but only if expectations are met.
Zuhair Khan, portfolio manager at Union Bancare Prive, said the rally was “real” as long as a strong and stable government gave confidence to the market, but warned that prices were predicated on progress that has already not materialized.
“The market is already pricing in some improvements that haven’t happened yet,” he said, citing asset sales, stock buybacks and hopes for improved margins. That leaves little room for disappointment.
“If the pace of improvement slows, there is a downside risk,” Khan said.
