Nikkei Soars to Record High on Takaichi Optimism, Yen Plummets on BoJ Caution

Japan's Nikkei 225 surged to record highs on Monday, breaching the 48,000 level for the first time, as investors anticipated a policy shift under Sanae Takaichi, the newly elected leader of Japan's Liberal Democratic Party (LDP) and expected next prime minister. Takaichi's pro-spending stance, reminiscent of the Abenomics era, fueled optimism about expanded fiscal stimulus and accommodative monetary policy. The benchmark index closed at 47,944, a 4.7% gain, with foreign and domestic investors buying shares across sectors, particularly in real estate, technology, and heavy industry. Analysts noted that while Takaichi's policies could revive economic growth, structural constraints-including a 3% inflation rate and a stronger yen-limit the scope for large-scale stimulus.

The yen, however, weakened sharply against the dollar, with USD/JPY surpassing 150.37, its highest since early August. This depreciation was driven by expectations of delayed Bank of Japan (BoJ) rate hikes and a widening U.S.-Japan yield differential, which bolstered carry trades. By October 8, the yen had fallen to 152.205 against the dollar, a six-week high for the greenback, and hit a record low of 176.35 per euro. Finance Minister Katsunobu Kato acknowledged the yen's volatility, signaling close monitoring of "excessive fluctuations" but refraining from direct intervention. The BoJ, meanwhile, maintained a cautious stance, with Governor Kazuo Ueda reiterating that a rate hike remains possible if inflation aligns with projections.

Market participants priced in a 25% chance of a BoJ rate hike in October, down from 60% before Takaichi's election. Analysts at Societe Generale and Goldman Sachs suggested the BoJ may delay tightening until December or January 2026, given Takaichi's preference for accommodative policies. This uncertainty dampened yen demand, with overnight indexed swaps reflecting reduced expectations of near-term monetary normalization. Meanwhile, U.S. government shutdowns and delayed economic data added to market volatility, though the Fed's expected rate cuts in October and December were seen as limiting the dollar's gains.

Technical analysis highlighted bullish momentum for USD/JPY, with the pair breaking above key resistance levels and the relative strength index (RSI) indicating overbought conditions. Traders anticipated short-term pullbacks before further gains, with support levels around 149.90–149.10 and resistance near 153.70–154.00. The Nikkei 225's rally, meanwhile, was attributed to a combination of weak yen-driven export sector gains and corporate reforms, including increased buybacks and capital allocation improvements.

Looking ahead, risks remain balanced. While Takaichi's fiscal expansion could boost stocks and corporate profits, it may also exacerbate Japan's debt challenges and yen weakness. The BoJ's policy path will be critical, with dissenting voices within its board hinting at potential hawkish shifts. Additionally, U.S.-Japan trade negotiations under President Donald Trump and the global economic outlook will shape market dynamics. Investors are advised to monitor BoJ communications and fiscal policy developments, as well as the Fed's easing timeline, for directional cues.

Source: [1] USD/JPY Breaks Above 150.37 as Takaichi Win Fuels Yen Weakness (https://www.fxleaders.com/news/2025/10/06/usd-jpy-breaks-above-150-37-as-takaichi-win-fuels-yen-weakness/)

[2] Yen drops to 7-month low on fiscal concerns, euro dips (https://www.reuters.com/world/asia-pacific/yen-slides-2-month-low-japan-election-angst-2025-10-07/)

[3] Yen weakest since mid-February on fiscal fears | Reuters (https://www.reuters.com/world/asia-pacific/dollar-rallies-us-shutdown-drags-weighing-confidence-2025-10-08/)

[5] Japanese Yen posts modest losses below 150.50 on political (https://www.fxstreet.com/news/usd-jpy-posts-modest-gains-above-15000-on-political-stability-concerns-in-japan-202510062300)

[6] Nikkei 225 surges to record high after Takaichi's win (https://www3.nhk.or.jp/nhkworld/en/news/20251006_B5/)

[9] Japan's stock market powers to a fresh record on a ... (https://markets.businessinsider.com/news/stocks/japan-stock-market-nikkei-record-high-sanae-takaichi-yen-abenomics-2025-10)

[10] Sanae Takaichi: Japan stocks hit record after ruling ... (https://www.bbc.com/news/articles/c20vljzgp0ro)

[12] BOJ debated chance of near-term rate hike, meeting summary ... (https://www.reuters.com/markets/currencies/boj-board-debated-possibility-near-term-rate-hike-meeting-summary-shows-2025-09-30/)

[13] Japanese Yen hovers near eight-month low as fiscal concerns weigh (https://www.fxstreet.com/news/japanese-yen-hangs-near-eight-month-low-against-usd-amid-fiscal-concerns-and-boj-outlook-202510100224)

[14] Japanese equities look set to brave political headwinds (https://www.lombardodier.com/insights/2025/september/japanese-equities.html)