Chart of The Day – JP225

The Japanese Nikkei 225 cash index is up more than 3% today, surpassing 49000 points and setting another historical record, following a previous high established earlier in October. The move is a direct response to hopes of ending the political deadlock in Japan. The broader Topix Index also recorded gains of 2%, primarily motivated by the electronics and financial sectors.

The aforementioned increase is mainly driven by expectations surrounding the conclusion of coalition negotiations. The Liberal Democratic Party (LDP) is prepared to sign a coalition agreement with the Japan Innovation Party (Ishin). The new government’s prime minister is expected to be the current LDP leader, Sanae Takaichi, known for her pro-growth views, which have recently led to a sharp rise in Japanese yields and yen weakness, due to expectations of significant debt issuance to support increased spending.

Yields on 10-year Japanese bonds have already reached 1.66%, significantly above the current policy rate of 0.5%. Source: Bloomberg Finance LP

Political Stabilization and the ‘Takaichi Trade’

The LDP and Ishin have reached a broad agreement, and the official coalition signing is scheduled for today. Takaichi, as LDP leader, is virtually guaranteed to assume the position of Prime Minister with the support of Ishin members. The vote for government approval is set to take place tomorrow.

The likelihood of a pro-stimulus policy is leading to continued bond sell-offs, equity purchases, and a renewed, albeit slight, weakness in the yen. Conversely, USDJPY has retreated significantly over the past few sessions and stabilized between 150 and 151.

During the LDP leadership campaign, Takaichi promoted plans for increased government spending on strategic industries, including defense, technology, cybersecurity, and nuclear energy.

Technical Situation on the JP225

The JP225 has achieved 25% gains this year, with the pace of growth accelerating recently, a trend not fully justified by currency movements. Nevertheless, there is renewed discussion about the return of the carry trade, even despite the risk of interest rate hikes in Japan. Interestingly, the gains in Japan have recently been larger than those on Wall Street. The next strong resistance levels for the JP225 are 50000 points and 51000 points, with the latter coinciding with the 200.0 extension of the decline from the beginning of the year. Support is located at the 161.8 extension, around the 47000 level.

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