Japan is experiencing a historic capital rotation. After decades of a bond-centric, "play not to lose" mentality that favored an aging population, the country is shifting capital into equities and other risk assets. This is driving its stock market to new highs and reflects a fundamental need to finance new growth industries.

When Japanese equities outperform U.S. markets on a dollar-adjusted basis, it triggers a "geographic diversification trade." This attracts a new wave of foreign investors, particularly from the U.S., whose capital inflows then push Japanese stock prices and multiples even higher, creating a positive feedback loop.

The election of Sinei Takechi is causing markets to anticipate a more activist fiscal agenda in Japan. This includes inflation relief and strategic investments. Paradoxically, this expectation of fiscal stimulus is simultaneously reducing pressure on the Bank of Japan for near-term interest rate hikes, creating a dual impact on the country's economic outlook.

After decades of stagnation, Japan is experiencing a bullish turn. PIMCO's CEO attributes this to two key factors: the first real inflation in years and a surge in corporate activism. Activist investors are breaking up conglomerates and improving business models, making Japanese equities newly attractive.

Following a historic election victory, the winning prime minister becomes personally associated with the pro-growth policies driving the market. Consequently, the biggest risk to the current rally is not economic but political: an unexpected resignation could abruptly end the cycle, as seen historically in 2006 with Prime Minister Koizumi.

For years, Japan was a value trap: cheap companies with poor governance hoarded cash. The game changed when Prime Minister Shinzo Abe introduced stewardship and governance codes, creating a top-down, government-backed catalyst for companies to finally improve capital allocation and unlock shareholder value.

The medium-term bearish outlook for the Yen remains, as a landslide victory for the ruling LDP is largely priced in, while a loss of their majority could paradoxically be more negative. An opposition win could lead to greater fiscal expansion and political uncertainty, potentially weakening the yen more severely in the long run.

The Nikkei's strength is not primarily driven by expectations of broad fiscal stimulus. Instead, equity investors are betting on the success of PM Takaichi's targeted policies to boost sentiment and spending among middle and lower-income households. This potential consumption recovery is a key upside catalyst that the market has not fully priced in yet.

Typically, global investors lead rallies in the Japanese equity market. However, the surge following Sanai Takaichi's election saw unusually strong momentum from domestic investors and high public expectation (68% according to one poll). This reversal of the usual pattern suggests a revival of "Abenomics" optimism locally.