By Kosaku Narioka


Japan's benchmark stock index hit a record intraday high on growing expectations for a general election next month that could solidify Prime Minister Sanae Takaichi's political standing and allow her to take bolder steps to boost the economy.

The Nikkei Stock Average was recently 3.1% higher at 53540.60 on Tuesday after earlier hitting an all-time intraday high of 53814.79.

Japanese daily Yomiuri reported late Friday, citing government sources, that Prime Minister Sanae Takaichi was considering dissolving the lower house later this month, which would likely lead to a general election in February. Japanese markets were closed on Monday for a national holiday.

Crédit Agricole economists said in a note that the ruling coalition was likely to win because of strong support for the Takaichi government, which was formed following a party vote in October. A general election by the summer was expected for the new government to win the public's trust, it said.

A win at the polls would allow the Takaichi government to pursue more aggressive fiscal policy and greater investment for growth as well as bolder security measures, Crédit Agricole said.

Barclays Chief Japan Economist Naohiko Baba said stocks are likely to continue rising, led by the sectors which could benefit from more aggressive fiscal policy such as defense, energy, semiconductors and artificial intelligence.

Still, Baba expects Takaichi will continue to allow the Bank of Japan's stance of gradual rate increases, which could slow economic growth, because she is greatly concerned about the yen's weakness.

Stocks have tended to rise in the past after the dissolution of the lower house through general elections, according to Eiji Kinouchi, chief technical analyst at Daiwa Securities. "If there is a resounding victory, stocks are expected to rise for about half a year," he said in a note.

A snap election in Japan could mean steeper Japanese government bond yields, a weaker yen and strength in equities, State Street Investment Management's Masahiko Loo said in an email.

The senior fixed income strategist said this is "the path of least resistance for now" amid a backdrop of the "Takaichi trade," referring to a strategy based on her apparent preference for aggressive economic stimulus and accommodative monetary policy, which could weigh on government bonds and weaken the yen.

Still, he warned that the markets could be overreacting given Takaichi's political constraints.

Even if Takaichi's ruling Liberal Democratic Party wins a lower house majority, its lack of control in the upper house means opposition support will still be required to pass legislation, Loo said.

Auto, electronics, and financial stocks were leading Tuesday's gains. Toyota Motor was up 5.6%, Tokyo Electron gained 7.9%, and Mizuho Financial Group was 5.4% higher.

The yen weakened to a one-year low of 158.76 to the dollar on Tuesday, compared with 157.38 as of Friday's Tokyo stock market close. The 10-year Japanese government bond yield was up 5 basis points at 2.140%.

-- Ronnie Harui contributed to this article.


Write to Kosaku Narioka at kosaku.narioka@wsj.com


(END) Dow Jones Newswires

01-12-26 2324ET