Tokyo – A divergence is growing within the Japanese stock market, as gains fueled by the so-called “Takaichi trade” increasingly benefit large-cap companies while leaving smaller firms behind. The rally, sparked by the election of Sanae Takaichi as leader of the Liberal Democratic Party in October 2025, has driven blue-chip stocks to record highs, but smaller companies and startups are struggling to participate in the upswing.
The “Takaichi trade” refers to the surge in investor confidence following Takaichi’s election, driven by expectations of continued loose monetary policy and potential government spending. This has led to a weakening yen and increased capital inflows, primarily into larger, more liquid stocks. According to data from the Tokyo Stock Exchange, indexes tracking the Prime, Standard, and Growth markets demonstrate this disparity, with large-cap stocks significantly outperforming their smaller counterparts.
The concentration of investment in larger companies is not solely attributable to the Takaichi effect. Governance reforms are also playing a role, making larger, more established companies with clearer structures and reporting standards more attractive to investors. These firms are perceived as lower risk and offer greater transparency, further bolstering their appeal in the current market environment.
The rally in Japanese equities has been particularly pronounced in sectors expected to benefit from Takaichi’s policy agenda. Defense-related stocks have seen substantial gains, fueled by expectations of looser export restrictions and potential revisions to Japan’s pacifist constitution. Technology companies, particularly those involved in artificial intelligence and semiconductors, are also benefiting from anticipated government investment in these strategic sectors. , Japanese stocks hit record highs, driven by gains in these sectors.
The impact on the yen has been significant. The currency has weakened as investors shift capital into Japanese equities, making exports more competitive but also raising concerns about import costs. Bond yields have also reacted sharply, with the 30-year Japanese government bond yield reaching a record high while shorter-term yields have fallen, reflecting expectations of delayed rate hikes by the Bank of Japan.
Exchange-traded funds (ETFs) focused on the Japanese market have seen increased demand. ETFs like DXJ, DBJP, HEWJ, and YCS have gained as investors seek exposure to the rally. However, the benefits are not evenly distributed. Smaller companies, often listed on the Growth market of the Tokyo Stock Exchange, lack the liquidity and visibility to attract the same level of investment.
Hitoshi Asaoka, chief strategist at Asset Management One, noted that the Nikkei was already on track to reach 48,000 by year-end, but Takaichi’s election accelerated that trajectory. This suggests that the market’s enthusiasm is closely tied to the perceived potential of her policies to stimulate economic growth.
While the “Takaichi trade” has generated significant momentum, concerns remain about the sustainability of the rally. Japan’s substantial public debt limits the government’s ability to implement expansive fiscal policies without putting pressure on bond yields and the yen. HSBC’s chief Asia economist cautioned that the market will face “an important constraint here,” given the country’s debt burden.
The divergence between large-cap and small-cap stocks raises questions about the long-term health of the Japanese economy. While the rally in blue-chip stocks is a positive sign, the exclusion of smaller companies could hinder innovation and limit broader economic participation. The ability of smaller firms to access capital and compete effectively will be crucial for sustaining economic growth in the years ahead.
The recent surge in Japanese stocks, with the Nikkei 225 hitting record highs, is not considered a fluke, but rather a result of a confluence of factors including a decisive election outcome, boosted investor confidence, and expectations of continued accommodative monetary policy. , foreign investors purchased the most Japanese stocks in 11 years, signaling a renewed interest in the country’s market potential.
As of , the situation continues to unfold, with investors closely monitoring the Bank of Japan’s actions and the implementation of Takaichi’s policies. The coming months will be critical in determining whether the benefits of the “Takaichi trade” will extend beyond large-cap stocks and contribute to a more inclusive and sustainable economic recovery.
