It has been a thunderous start to the year for the Nikkei 225, up 13% since 1 January. This follows on from three years of outstanding performance: +28% in 2023, +19% in 2024 and +26% in 2025.

Amongst developed market indices, only two are outperforming the Nikkei: South Korea's KOSPI (+31%) and Taiwan's TWSE (+19%). Two highly specific benchmarks, as their performance depends heavily on just one or two semiconductor giants, the hottest sector since the start of the year (Samsung and SK Hynix in South Korea, TSMC in Taiwan).

The rally in Japanese equities has notably been fuelled by the prime minister's election victory in the lower-house vote. Riding high in approval ratings since taking office last October, in January Sanae Takaichi decided to dissolve the House of Representatives. A winning bet, judging by the results on the evening of February 8.

With 316 seats out of 465, Sanae Takaichi has secured the LDP's largest majority in the lower house. The victory will give her a free hand to roll out her agenda: an economic stimulus plan at home and, internationally, a Japan that shows a bit more muscle. Sanae Takaichi was thus named "the most powerful woman in the world” by The Economist.

Japanese stocks are also benefiting from a stabilising yen. In January, Japanese and US authorities signalled the possibility of intervention through a technical operation by the New York Fed. This aims to send a signal to the market to halt the currency's slide. Indeed, yen depreciation has long been a drag for foreign investors, as it reduces the value of their holdings.

Japan's markets were long shunned by international investors after the bursting of the 1980s bubble. However, in recent years they have been taking an interest in Japan again. The Japanese market includes many high-quality companies, while offering attractive valuations. Corporate governance has also improved, notably through the gradual unwinding of cross-shareholdings. Finally, companies have revised their payout policies and are returning more cash to shareholders.

For the Nikkei, what comes next will also depend on Sanae Takaichi's success in delivering her economic stimulus program, and on the Bank of Japan, which is still in a phase of normalising its monetary policy.