A board displays the Nikkei stock average. The closing benchmark on the TSE reached an all-time high of 52,400 yen on the afternoon of October 31. (©Sankei by Masahiro Sakai)
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The inauguration of the new Cabinet led by Prime Minister Sanae Takaichi has led to a boom on the Tokyo Stock Exchange (TSE).
On October 27, the Nikkei average hit the 50,000-yen benchmark for the first time and continued to rise after reaching this milestone. It closed at 52,411.34 yen on October 31.
October saw the largest-ever increase in the benchmark average of stock prices, exceeding 7,400 points.
Foreign investors have been won over by Takaichi's "responsible active fiscal policy" approach to economic growth and a strong economy. That assessment has given a further boost to Tokyo stock prices, which had long been perceived as undervalued. This phenomenon has come to be known as the "Takaichi trade."
Of course, investor expectations may be getting ahead of themselves. Still, a revitalized stock market can give a boost to the economy. The key will be whether this trend can be translated into a strong recovery for the real economy. Prime Minister Takaichi's policy skills will surely be put to the test in the future.
Driving the Stock Market's Rise
The recent rise in stock prices has been driven in part by easing concerns about escalating trade friction between the United States and China, as well as investments in growth areas such as artificial intelligence. Add to this the high expectations for the Takaichi administration. The result is the remarkable surge the Tokyo market has experienced as compared to overseas markets.
Of course, Japan must remain vigilant against overheating of the market. As the impact of the Trump tariffs becomes more pronounced, exports by Japanese companies also may be hit harder than expected.
Even after the US-China summit in Gyeongju, South Korea, the seeds of renewed friction between the two biggest economies remain. There is also a risk that stagnation in those economies will drag down the global economy. These circumstances make it difficult to be optimistic about the Japanese economy.
Nevertheless, the Takaichi administration can and should set the economy on a path of sustainable growth.
Getting to Sustainable Growth
In order to overcome the current situation in which wage hikes are not keeping up with rising food prices, the government should focus on measures to combat rising prices. It must also create an environment that encourages investment in growth areas. Rather than simply throwing money around, it should assess the effectiveness of the budget, carefully consider the sources of funding, and then use government expenditures wisely to achieve medium- to long-term growth.
An eye should also be kept on any separation between the Bank of Japan and Prime Minister Takaichi regarding monetary policy. Unlike the BOJ, which is considering further rate hikes, Takaichi is viewed as being cautious about raising interest rates.
However, it is important to note that if interest rate hikes are further delayed, that could further weaken the yen. In turn, that could push up import prices and accelerate inflation.
The BOJ decided not to raise interest rates further at this time at its October 30 monetary policy meeting. Its decision was made in light of the uncertainty in overseas economic conditions and price trends caused by Trump's tariffs.
The BOJ's responsibility is to calmly assess the actual state of the economy, not the political climate, and work to stabilize prices. This should be kept in mind in the conduct of monetary policy going forward.
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Author: Editorial Board, The Sankei Shimbun
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