The Japanese stock market is experiencing a remarkable rally.

On October 6, the Nikkei 225 index surged 4.8%, breaking through the 47,000 point mark for the first time.

On October 9, the index closed up 845.45 points, or 1.77%, at 48,580.44 points.

Behind this rally lies a shift in policy expectations brought about by political change in Japan. On October 4, Japan's ruling Liberal Democratic Party (LDP) held its leadership election, and Sanae Takaichi unexpectedly won, becoming the LDP's new leader. Given that the LDP remains the largest party in Japan's Diet, Sanae Takaichi is highly likely to become Japan's first female prime minister in the prime ministerial designation election on October 15.

"Sanae Market"

Currently, the "Sanae Market" has become a new keyword in Japan's financial markets.

Sanae Takaichi is seen as a staunch inheritor of "Abenomics," with policy preferences clearly favoring monetary easing, yen depreciation, and fiscal expansion.

She explicitly expressed opposition to interest rate hikes during her campaign, advocating for increased government spending and tax cuts, which aligns with the policy framework of "Abenomics."

Nomura strategist Naka Matsuzawa stated that as long as the yen remains weak, the Japanese stock market's upward trend is expected to continue. He noted that foreign investors, who had paused stock purchases after July's House of Councillors election, are rebuilding their positions, further driving the market rise.

Additionally, the significant weakening of the yen against the US dollar provides an additional performance boost for export-oriented Japanese companies.

Dual expectations of loose monetary policy and proactive fiscal policy have created market optimism about Japan's economic prospects, attracting substantial capital inflows into the stock market. As Sanae Takaichi's policy blueprint becomes clearer, strategists at major Japanese brokerages have successively raised their year-end targets for the Nikkei 225 index.

Nomura Securities raised its year-end target for the Nikkei 225 index from 44,500 points to 49,000 points, an increase of at least 10%.

The firm's strategists noted in a report that after Sanae Takaichi takes office, stimulus policies are expected to drive corporate profit growth, and they believe foreign capital inflows could sustain the stock market rally.

Daiwa Securities raised its year-end target for the Nikkei 225 index from 44,000 points to 49,000 points and expects it could reach the historic 50,000 point mark within the year.

Daiwa Securities analysts believe Sanae Takaichi's election as LDP leader could strengthen expectations for economic growth, further boosting market confidence.

SMBC Nikko Securities raised its year-end target for the index from 45,000 points to 47,000 points. The institution expects that next-generation energy technology, cybersecurity, and defense will be the main beneficiary sectors under Sanae Takaichi's leadership, likely receiving policy support.

Julius Baer's outlook is more aggressive, raising its year-end target for the Nikkei 225 index from 46,000 points to 50,000 points. The institution views Japan as "an attractive developed market," with the AI boom, medium-to-long-term structural reforms, and the push from "Sanaenomics" contributing to a growth path.

Economic Challenges

Although the market has reacted positively to Sanae Takaichi's policy framework, Japan still faces severe economic challenges.

Analysis points out that the scale of Japanese government debt has exceeded 1,200 trillion yen, accounting for over 250% of GDP, making it one of the countries with the highest debt ratios among developed nations. While the fiscal stimulus policies advocated by Sanae Takaichi could provide a short-term economic boost, they might further exacerbate Japan's debt burden, raising market concerns about the credibility of the yen.

Regarding monetary policy, Sanae Takaichi has explicitly expressed opposition to interest rate hikes, advocating for maintaining a loose monetary environment. However, the Bank of Japan has already begun a rate hike cycle to curb inflation. Balancing monetary policy with government demands will be a challenge for the new government.

George Efstathopoulos, a fund manager at Fidelity International, told the International Finance News that after decades of deflation, Japan has now entered a sustained reflation period as wages and service prices rise. The Bank of Japan has initiated monetary policy normalization, but this process is hindered as inflation remains persistently above target levels.

A CICC (601995) research report pointed out that if monetary and fiscal easing measures are too aggressive, there is a possibility of Japan's inflation rising again. Against this backdrop, if Japan continues to maintain monetary easing, real interest rates would fall further, leading to a significant depreciation of the yen exchange rate, which would ultimately push inflation even higher.