Japanese stimulus boosts Topix rally

Analysts at investment banks say that the Japanese government’s stimulus package is driving the recent surge in the Topix index. Since the beginning of 2025 the benchmark has beaten almost every other market worldwide and has remained the leading performer for investors measuring returns in both U.S. dollars and euros for more than twelve months.

It now trades roughly 600 basis points ahead of the S&P 500, having climbed about 20% in dollar terms and 22% in euro terms, and it has stayed ahead of virtually all overseas indices from 1 January 2026 onward, while retaining the top ranking in both currencies since 1 January 2025. The upward trend continues even as Japan’s long-term rates rise, a development some participants had feared would dampen the rally.

Mabrouk Chetoune, head of global market strategy at Natixis Investment Managers, and Romain Aumond, a senior macroeconomist, attribute this resilience to a positive economic outlook. Their models indicate that nearly 85 per cent of the recent increase in Japanese rates reflects investor confidence in growth prospects. That contrasts with other developed markets, where higher yields are often driven by a mix of monetary policy and financing needs.

The strategists link this optimism to Prime Minister Sanae Takaichi’s fiscal strategy, which includes ¥75 trillion directed at demand support. This spending, inspired by Keynesian principles, aims to bolster the economy’s potential growth rate through tax cuts and public-private partnerships in strategic sectors like artificial intelligence, energy, infrastructure, and security. These initiatives run to a 2040 horizon and are designed to lift the economy’s potential growth rate, backed by ¥3,700 trillion in investment over 15 years.

Analysts note that these efforts also support the yen, creating a dynamic where a weaker currency aids export performance and corporate earnings. While the Bank of Japan has begun gradual tightening, the strategists view this as a normalisation of policy rather than a barrier to stock price growth. They expressed confidence in the plan’s success, stating it provides a structural response to raising Japan’s level of production. Overall, Chetaoune and Aumond said they have “no doubt” about the success of the plan, which, beyond its Keynesian inspiration, also provides a “structural and imperative response to raising Japan’s level of production”.