Japan’s First Female PM Just Triggered a $3 Trillion Stock Market Rally

Japan’s Nikkei 225 surged nearly 6% to an unprecedented 57,337 on Monday morning after Prime Minister Sanae Takaichi’s Liberal Democratic Party secured a two-thirds supermajority in Sunday’s snap election — the party’s most decisive win since 1996.

European Business Magazine | February 2026

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What just happened? Takaichi’s LDP won 316 of 465 seats in Sunday’s lower house election, giving her a supermajority that allows the ruling coalition to override the upper house without opposition support. Markets responded immediately: the Nikkei 225 blew through 55,000, 56,000 and 57,000 within the first 30 minutes of Monday trading, while the broader Topix hit a record 3,825. The benchmark index is now up more than 45% over the past year.

Sanamania Meets Sanaenomics

Voters braved heavy snowfalls in Tokyo and across Japan to deliver what exit polls indicated was the most decisive LDP victory in three decades. For a party that suffered two embarrassing parliamentary election losses in the past two years — crippled by slush fund scandals and plunging approval ratings under Takaichi’s predecessor — the turnaround is remarkable.

The scale of the mandate matters. A supermajority means Takaichi can now pass legislation without upper house approval, removing the parliamentary gridlock that had forced her into uncomfortable bargains with opposition parties since taking office in October. For investors, that translates into policy certainty — and Takaichi’s policy is unambiguously pro-spending.

“The stock market is a true believer in Takaichi, so the big win is going to be good news for equities,” said Chris Scicluna, head of research at Daiwa Capital Markets Europe. Electronics, banks, defence and AI-related stocks led Monday’s rally.

What Takaichi Plans to Spend

Japan’s first female prime minister is a devoted disciple of the late Shinzo Abe’s stimulus playbook, and she has wasted no time updating it. Her ¥21.3 trillion stimulus package, unveiled shortly after taking office, rests on three pillars: ¥11.7 trillion in cost-of-living support to offset rising prices, ¥7.2 trillion in strategic investment across 17 priority sectors including artificial intelligence, semiconductors and quantum technology, and ¥1.7 trillion to strengthen national defence.

Defence is where Takaichi has been most aggressive. She accelerated Japan’s defence spending to 2% of GDP via a supplementary budget — a target that had originally been set for 2027 — and some government officials have even floated the idea of Japan possessing nuclear weapons. A proposed defence tax equivalent to 1% of personal income tax is planned for 2027.

Her fiscal 2026 budget is expected to exceed ¥120 trillion, another record. The question hanging over everything is how Japan pays for it. With the world’s largest developed-economy debt burden — a debt-to-GDP ratio above 200% — Takaichi’s spending ambitions have already unsettled bond markets. When she called the snap election in January and announced plans to suspend the sales tax on food for two years, 30-year Japanese government bond yields shot to a record 3.88%.

The Takaichi Trade

Since she became LDP leader in October, a pattern has emerged that traders have dubbed the “Takaichi trade”: stocks up, bonds down, yen weak. The Nikkei closed at 54,253 on Friday — up 19% since the day before she won the LDP presidency — and Monday’s surge extends that momentum further.

The sectors benefiting most are those Takaichi has explicitly earmarked for targeted investment. Defence contractors, AI and semiconductor firms and shipbuilders have all outperformed, while banks have rallied on rising yields and expectations of increased lending. For European investors already navigating a pivotal year for continental equities, the Japanese rally offers both opportunity and a useful comparison — two major economies pursuing aggressive fiscal expansion simultaneously.

The yen, however, remains a concern. It has lost roughly 6% against the dollar since Takaichi took office and hit record lows against the euro and Swiss franc. Only threats of joint currency market intervention with the United States have arrested its slide. A weaker yen boosts Japanese exporters but inflates import costs for energy and food — a politically sensitive issue for a prime minister who promised voters relief from rising prices.

What Could Go Wrong

Not everyone is convinced. Oxford Economics’ Shigeto Nagai cautioned that Takaichi must “strike a delicate balance between proactive fiscal policy and fiscal discipline,” warning that a further rise in JGB yields could force the Bank of Japan into faster rate hikes than the economy can absorb. Interest payments on government debt are projected to climb from ¥10.5 trillion to ¥16.1 trillion by fiscal 2028 — a 50% increase that will squeeze every other budget line.

Geopolitically, Takaichi’s November comments suggesting Japan could deploy military forces in a Taiwan contingency triggered a sharp response from Beijing: reimposed bans on Japanese seafood imports, restrictions on rare-earth mineral exports and warnings against Chinese tourism to Japan. China remains Japan’s largest trading partner, and a sustained deterioration in that relationship poses material risks to corporate earnings — particularly in manufacturing and sectors competing for Asian market share.

What It Means for European Investors

Japan committed to investing $550 billion in the US by the end of Trump’s presidential term, with nearly $400 billion announced when Takaichi met Trump in October across energy, AI and critical minerals. That spending will flow through Japanese corporates that European institutional investors increasingly hold.

The broader signal is one of competitive fiscal expansion. Japan is pouring money into AI, semiconductors and defence at exactly the moment Europe is doing the same through Germany’s infrastructure spending revolution and renewed NATO commitments. For sectors where spending overlaps — defence tech, semiconductor supply chains, AI platform companies — the rising tide could lift boats on both sides of the Eurasian continent. Combined with India’s simultaneous trade breakthroughs with the EU and US, and a resurgent European IPO market, the global investment landscape is shifting faster than at any point since the pandemic. But it also means more competition for talent, components and capital.

The Nikkei’s 45% rally over the past year makes it one of the best-performing major indices globally. Whether that continues depends on whether Takaichi can convert political capital into economic growth without blowing up the bond market in the process. Monday’s market verdict was emphatic. The longer-term jury is still out.