Sanae Takaichi stimulates rise in Japanese stocks? Nomura: Short-term momentum fading, pay attention to this indicator going forward.

The "Sanae Takaichi rally" is cooling down.

At the start of this week, following Sanae Takaichi’s election victory, the Nikkei 225 Index rose sharply by over 4%, marking the largest single-day increase in months. But in the days that followed, the upward momentum gradually faded and the market entered a consolidation phase.

At the same time, “theme stocks” related to Takaichi’s policies, after recovering from their previous declines, are beginning to show signs of losing momentum.

According to data from Chasing Wind Trading Desk, a report released by Nomura Securities on October 9 pointed out that the core driving force of the market rally after Sanae Takaichi’s victory came from expectations of fiscal expansion, rather than monetary easing. Whether the “Takaichi rally” can be sustained depends not so much on economic policy itself, but rather on whether the new government can maintain high support and political stability—otherwise, a historic reversal pattern may repeat.

Market movements reflect investors’ cautious attitudes. Commodity Trading Advisors (CTAs) and other speculative investors currently hold net long positions in Japanese stocks worth over 2 trillion yen, limiting further room for adding to those positions, and have now switched to "standby mode." Macro hedge funds have also paused their accumulation of Japanese stocks, indicating that incremental funds to the market may be limited in the short term.

Nomura’s report emphasizes that the watershed for future trends lies in the political sphere. If the new leader Sanae Takaichi can form a stable government and maintain high support rates, relevant stocks may continue to rise, driven by overseas investors; conversely, if political instability arises, these stocks could repeat historical reversal patterns, especially among high-volatility stocks.

Expectations ebb, rally may be hard to sustain

The initial momentum behind the “Takaichi rally” is at risk of fading. Nomura analyst Yoshitaka Suda pointed out that the current Japanese stock market rally driven by expectations of fiscal expansion is similar to the situation in the German stock market in March this year. At that time, Germany’s policy adjustment led its stock index to outperform other developed markets for about two weeks, but the rally quickly lost steam thereafter.

The report believes that the rise in Japanese stocks driven by expectations is likely to weaken over time, and the market does not show signs of overheating like it did during the early stages of “Abenomics.”

Nomura points out that for Japanese stocks to gain further upward momentum, more specific and tangible progress may be needed—for example, the Liberal Democratic Party forming a governing coalition with the Democratic Party for the People (LDP-DPP), or at least some policy coordination toward that goal.

Speculative forces pause, CTA and hedge funds stop chasing highs

In terms of fund flows, speculative investors have shifted from active buying to a wait-and-see approach. Nomura’s model estimates that CTA net long positions in Japanese stocks exceeded 2 trillion yen last week, greatly limiting their potential for further net buying at this stage. The report expects CTA won’t reverse and exit their long positions unless the Nikkei 225 index falls to around 46,400 points.

Meanwhile, macro hedge funds also appear to be catching their breath, pausing the accumulation of long positions in Japanese stocks. This is partly based on the assumption that the Bank of Japan will continue its rate hike path to prevent excessive depreciation of the yen.

In the forex market, this week’s depreciation of the yen seems mainly due to investors closing out long yen positions. Nomura’s analysis shows that speculators overall have not completely shifted to going long USD/JPY, and yen carry trades remain in a “sluggish” state. This suggests that, despite the stock market rebound, investors still remain cautious about a full shift toward risk-on mode.

Lesson from history: Reversal risks after political honeymoon

Historical data provides important reference for the future of "Takaichi theme stocks". Nomura conducted an event study of market performance after new governments took office since the Koizumi government of 2001 and found a clear pattern.

First, in the one to two weeks following a House of Representatives election or LDP presidential election, theme stocks related to the new leader’s policies usually outperform the broader market. Second, in the following three months, these stocks tend to reverse and decline.

However, there are two marked exceptions: after the Koizumi government and after Abe Shinzo’s second term began. In those cases, after the initial strong showing, relevant stocks entered a plateau period lasting two to three months, then once again outperformed the market. The report points out that the common denominator in these exceptions was the government’s solid high approval rating at the time.

Based on historical analysis, Nomura believes the approval rating of the Sanae Takaichi government will be key to determining the fate of related stocks. If the new leader Sanae Takaichi can form a stable government and maintain high approval ratings, relevant theme stocks may once again sustain a rally similar to those seen in the Koizumi and Abe eras, driven by foreign investors.

Conversely, if Japanese politics—especially Takaichi’s leadership position within the party—becomes unstable, the market is likely to see a repeat of the pattern seen during most other governments: reversal in relevant theme stocks, with high-volatility stocks suffering especially sharp declines.

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