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Why Japanese Stocks Are Hitting Record Highs

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Japanese stocks have surged to record highs this week while the yen weakened, and bond yields rose on reports that Prime Minister Sanae Takaichi may call snap elections soon. Takaichi is hoping to convert her high approval ratings into a parliamentary majority for her party.

The Nikkei, which has been rising since Takaichi became Japan’s first female prime minister in late October, significantly outperformed the SPDR S&P 500 ETF (SPY - Free Report) last year. Takaichi is known as a protégé of former Prime Minister Shinzo Abe and a supporter of Abenomics.

Investors are hopeful that Takaichi will introduce aggressive fiscal spending, including increased defense outlays and tax cuts to support economic growth. She has also pledged to boost investment in high-growth areas such as artificial intelligence and semiconductors. Overall, her policy agenda appears supportive of Japanese equities, and the market is optimistic about the so-called Takaichi trade.

Japan’s stock market was already performing well even before the election. Improved corporate governance and more shareholder-friendly policies have attracted global investors back to Japan. The country is seeing a strong reflationary trend, with growth, wages, and prices all on the rise.

Concerns about a potential bubble in NVIDIA (NVDA - Free Report) and other artificial intelligence beneficiaries have also led some investors to look to Japan, where valuations appear more reasonable relative to the US. At the same time, Japanese technology stocks continue to benefit from artificial intelligence enthusiasm, given the country’s important role in global technology supply chains.

Warren Buffett’s endorsement has also supported Japanese equities. The Oracle of Omaha began investing in five Japanese trading houses in 2019 and has compared their diversified business models to Berkshire Hathaway (BRK.B - Free Report) itself.

Buffett has continued to increase his stake while effectively hedging the currency risk. The value of his positions recently topped $30 billion, according to CNBC. Earlier this year, he told shareholders that Berkshire will hold these investments for “50 years or forever.”

To learn more about the WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) , iShares MSCI Japan ETF (EWJ - Free Report) , and other Japan ETFs, please watch the short video above.

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