Sanae Takaichi Poised to Become Prime Minister, Nikkei Breaks 49,000 for the First Time

TradingKey - On October 20, the Nikkei 225 Index surged past the 49,000 mark for the first time, closing up 3.37% at a record 49,185.5 points. 

This rally was driven by the announcement of a coalition between Japan's Liberal Democratic Party (LDP) and the Japan Restoration Party (JRP), with the latter set to support Sanae Takaichi in Tuesday's prime ministerial election, making her victory almost certain.

According to reports by Kyodo News and other Japanese media, the LDP agreed to the JRP's condition to reduce the number of parliamentary seats by 10%. The two parties will engage in an "external cabinet cooperation," meaning JRP members will not join the new cabinet.

There is also a proposal to appoint Takashi Endo, chairman of the JRP's Committee on Parliamentary Affairs, as a special assistant to the prime minister. JRP representative Hirofumi Yoshimura stated that an important liaison is needed to coordinate between the prime minister's office and various ministries, and Endo is well-suited for this role.

Japanese media analysis suggests that this cooperation virtually guarantees Takaichi's election as prime minister. Currently, the LDP and JRP together hold 231 seats in the House of Representatives, just shy of the 233 needed for a majority. The LDP is urging some independent lawmakers to cooperate, aiming to secure victory in the prime ministerial election.

This political restructuring has alleviated previous uncertainties. Takaichi has long advocated for fiscal stimulus policies, aligning more closely with the JRP's right-wing policy stance. The JRP's support adds new political strength to her policy agenda, reigniting the "Takaichi Trade" — going long on Japanese stocks and short on the yen.

As the Nikkei 225 Index reached a historic high, the TOPIX also rose 2.46% to 3,248.45 points. Meanwhile, the yen fell sharply, with the dollar climbing to 151.2 yen at one point.

Bank of America expressed optimism about the Takaichi Trade, noting that the change in Japan's political leadership signifies a shift toward growth-oriented policies. Consequently, they have raised their annual targets for both indices, projecting the Nikkei and TOPIX could reach 50,000 and 3,370 points, respectively, if the market momentum persists.

Additionally, stocks regarded as "Takaichi-related" saw significant gains. Japanese defense stocks surged, with Mitsubishi Heavy Industries up 2.84%, Kawasaki Heavy Industries up 2.13%, and IHI soaring 4.89%. 

AI-related Japanese stocks also climbed sharply, notably SoftBank Group, which jumped 8.49%, closing at a record high of 24,985 yen. Takaichi previously pledged to heavily invest in the chip and AI sectors.