Daniel Hurley, a portfolio specialist at T. Rowe Price, stated that the Japanese stock market has limited room for further gains. The market has already priced in expectations of a victory for high市, subsequent fiscal stimulus measures, and a weaker yen. From current levels, the yen has the potential to appreciate, and Japanese inflation is expected to persist, especially as the spring wage negotiations commence. This will allow the Bank of Japan to cautiously continue tightening its monetary policy. Daniel Hurley noted that Japan's first female prime minister, high市早苗, is preparing to call a snap election in early February, hoping to capitalize on high approval ratings to secure a majority in parliament for the ruling Liberal Democratic Party (LDP). He considers this a bold political gamble. Although high市's cabinet approval rating is as high as 75-76%, surpassing some peak periods under Shinzo Abe's administration, the LDP's own support rate remains relatively weak, hovering in the mid-30% range, below the level before its significant defeat in 2024. He said financial markets have reacted strongly to Japan's election prospects. The Japanese stock market hit a record high, driven by investor expectations that a high市 victory will re-establish political direction and pave the way for fiscal stimulus, fueling what investors call the "high市 trade," particularly in areas like artificial intelligence, nuclear energy, and defense. However, the yen has weakened due to market concerns about a shift towards looser fiscal policy, recently hitting an 18-month low, which increases the possibility of an earlier interest rate hike by the Bank of Japan.
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