Nikkei Rally Fueled by Hopes for New Takaichi Administration, Gains in U.S. Stock Markets, AI Boom

By Yusuke Fukuhara and Itsuki Okuda / Yomiuri Shimbun Staff Writers

1:00 JST, October 29, 2025

The major factors that pushed the Nikkei Stock Average to a record high on Monday were the expectations for the Takaichi administration, the rise in U.S. stock prices and the market expansion of artificial intelligence.

The Nikkei Stock Average exceeded the major threshold of 50,000 after rising by 10,000 points in three months.

While some point out that Japanese stocks appear undervalued compared to U.S. stocks, there are also warning signs of overheating that are detached from the true state of the economy.

Stocks reflecting Takaichi’s focus

Expectations for the economic policies of the new administration of Prime Minister Sanae Takaichi are underpinning the stock market rise.

The Nikkei average gained more than 6,000 points in the roughly month and a half between the announcement of former Prime Minister Shigeru Ishiba’s resignation and the formation of the Takaichi administration.

In her policy speech on Friday, the prime minister made clear her stance of prioritizing the economy, stating that she would implement aggressive fiscal spending to build a strong economy.

In particular, overseas capital continues to flow in, anticipating a revival of the Abenomics economic policy that promoted aggressive fiscal policy and monetary easing.

Companies in the defense and other sectors prioritized by the prime minister especially saw significant gains. This led to stock price rises, with Kawasaki Heavy Industries Ltd. reaching an all-time high on Monday for the first time in 36 years.

The stock rally has spread across a wide range of fields including the automotive, infrastructure and nursing care sectors. An official at Mitsubishi UFJ Morgan Stanley Securities Co. views the 50,000 mark as merely a waypoint. He forecasts that the index could rise to 53,000 next year if corporate earnings continue to improve.

U.S.-China tensions ease

However, given that the new administration’s growth strategy has yet to be realized, external factors are a major contributor to the current stock surge.

The U.S. Federal Reserve Board is expected to decide on a second consecutive interest rate cut at this week’s Federal Open Market Committee meeting in response to the deterioration of the employment situation.

Anticipating a boost to the economy, the Dow renewed its all-time high on Friday, and the Tokyo market followed suit. This momentum is further bolstered by the increasing likelihood of another interest rate cut by the Fed before the end of the year.

In addition, ministerial-level trade talks between the United States and China held in Malaysia through Sunday led to the expectation that China would postpone strengthening its export restrictions on rare earths. The prospect of averting additional U.S. tariffs on China spread a sense of relief across the market.

Is it a bubble?

Another factor supporting the global stock market rally is the market expansion of AI and semiconductors.

Nvidia Corp., a major U.S. semiconductor company essential to AI, saw its market capitalization reach $4 trillion (about ¥580 trillion) in July, a world first.

A U.S. stock index composed primarily of semiconductor-related stocks has risen about 40% since the start of this year, significantly outperforming the growth rate of the Dow.

In Japan, rising stock prices of companies with significant influence on the Nikkei average, such as semiconductor-related companies Advantest Corp. and Tokyo Electron Ltd., as well as SoftBank Group Corp., have pushed up the Nikkei average.

However, some are concerned that the rapid rise of AI-related stocks could lead to an AI bubble.

The International Monetary Fund cited overly optimistic expectations for AI as one of the downside risks in its World Economic Outlook published this month.

“Concerns about overheating in AI-related stocks are beginning to emerge in some quarters,” said Hikaru Yasuda of SMBC Nikko Securities Inc.