A long-running rally in Japan’s stock markets has broken into a full sprint, powered by new political fuel and a fresh burst of AI euphoria that is sending stocks to records.
Over the weekend, Prime Minister Shigeru Ishiba announced his resignation, setting off a leadership race inside the ruling Liberal Democratic Party. Investors immediately took it as a bullish sign, sending the already red-hot Nikkei 225 higher.
On Friday, Japan’s Nikkei 225 index notched a fresh record high for the third time this week. The benchmark index is about 12% higher this year to date.
The surge was in part powered by SoftBank’s 17% weekly gain on the heels of Oracle’s blockbuster surge, but the momentum goes far beyond one stock.
As inflation stays above the Bank of Japan’s 2% target, markets have widely expected the central bank to keep raising interest rates after decades of ultra-loose policy. Ishiba’s exit shifted the outlook.
Political fuel
The rally isn’t new — Japan has outperformed in recent years post-pandemic. But the latest surge reflects a cocktail of global monetary shifts, spillover from the AI boom, and a weaker currency converging with politics in Tokyo.
“The resignation of PM Ishiba continues to foster some expectations that his successor may adopt more expansionary fiscal and monetary policies, which continues to bolster market sentiment,” Deutsche Bank analysts wrote in a Thursday note.
The prospect of fresh stimulus and leadership change coincided with the Nikkei smashing through 44,000 for the first time on Thursday, cementing Japan as one of the world’s standout markets in 2025.
A persistently weak yen has made Japanese assets cheaper to foreign buyers, stoking demand. Corporate reforms also helped.
Investors who long overlooked Japan are now treating it as one of the most compelling market stories of the year. Overseas funds have largely been net buyers through much of this year.
Tech fuel
Artificial intelligence has become another boon for Japanese equities.
Japan plays key roles in semiconductor materials, industrial robotics, and quantum computing, all of which are critical to the AI supply chain, wrote Winnie Wu, the cohead of China equity research and chief China equity strategist at BofA Global Research, in a September 4 report.
That makes the market among the key beneficiaries of massive global investment into AI.
That AI frenzy gathered pace this week after Oracle’s blockbuster AI-fueled rally spilled over into Tokyo, sending shares of Softbank — a key partner — soaring.
The Fed factor
Across the Pacific, the Federal Reserve has signaled it’s preparing to cut rates after two years of restrictive monetary policy. That shift has global ripple effects.
Lower US rates weaken the dollar, ease global liquidity conditions, and give investors more appetite for risk.
In response, the S&P 500 and Nasdaq have hit fresh record highs this week — leading broad gains in the global markets, including Japan.
Risks to watch
Of course, the rally isn’t risk-free.
A sudden strengthening of the yen could dent exporters’ earnings and trigger a monetary policy response, as in the summer of 2024, when the Bank of Japan surprised markets by hiking rates for the first time in years.
That policy shift sent the yen sharply higher, triggered a messy unwind of crowded carry trades, and caused a global market meltdown.
And valuations in some hot sectors — especially tech names riding the AI boom — are beginning to look stretched.
“Markets are racing ahead of fundamentals,” wrote Nigel Green, the CEO of financial consultancy deVere Group, in a Thursday note.
