It has been a thunderous start to the year for the Nikkei 225, up 13% since 1 st January. That comes on the heels of three years of standout performance: +28% in 2023, +19% in 2024, and +26% in 2025.

Among developed-market indices, only two are doing better than the Nikkei: South Korea's KOSPI (+31%) and Taiwan's TWSE (+19%). Both are unusual benchmarks, as their moves depend heavily on 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 been driven in particular by the prime minister's victory in the general election. Riding high approval ratings since taking office last October, Sanae Takaichi decided in January to dissolve the House of Representatives. It proved a winning bet, judging by the results on the evening of 8 February.

With 316 seats out of 465, Sanae Takaichi has secured the LDP's largest majority in the lower house. The victory will give her ample room to push through her agenda: at home, an economic stimulus; abroad, a Japan that flexes a bit more muscle. The Economist has therefore dubbed Sanae Takaichi "the most powerful woman in the world".

Japanese equities are also benefiting from the yen's stabilisation. In January, Japanese and US officials signalled the possibility of intervention via a technical operation by the New York Fed. The idea is to send a signal to the market to stop the currency's slide. The yen's depreciation has long been a drag for foreign investors, as it translates into a loss of value on their investments.

Japanese markets were long shunned by international investors after the burst of the 1980s bubble. But in recent years, they have been taking a fresh look at Japan. That is because the Tokyo market includes many high-quality stocks while still offering attractive valuations. Governance has also improved, notably with 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 hinge on Sanae Takaichi's success in delivering her economic stimulus program and on the Bank of Japan, which remains in the process of normalising its monetary policy.