Konnichiwa.

Pledges to spend on education and child care, stay tough on North Korea and revise the pacifist constitution are likely to be pillars of Japanese Prime Minister Shinzo Abe’s campaign in a snap election next month, government sources said on Tuesday.

That short excerpt is from a Reuters piece out last night and it should give you a hint of what to expect from Japanese equities in the near-term.

The Topix rose to a 2-year high and the Nikkei surged nearly 2% (its best day since May) as markets caught up coming off the long weekend on Tuesday:

Nikkei

Clearly, those gains are in part an extension of weakness in the yen, which fell for a third day and is now sitting near a 2-month low against the dollar:

USDJPY

This is all part of the same story. The stronger Abe’s support, the more likely it is that the BoJ will have the government’s blessing to proceed apace with existing easing, a scenario which sets the stage for further policy divergence with the U.S. and Europe. That’s yen negative and by extension, equity positive.

Meanwhile, the North Korea threat is likely to bolster Abe’s appeal among voters. Two-thirds of those surveyed in a recent NHK poll said they approved of Abe’s strong line on the hermit regime in Pyongyang.

“The equity market is taking the news about a possible snap election positively as it boosts expectations Abe’s coalition parties will retain power [and] Japanese shares generally gain around calls to hold new elections,” Nomura’s Hisao Matsuura writes in a new note.

“A snap election called by Prime Minister Abe would appear to be aimed at solidifying his political standing, which would be positive for risk sentiment,” Barclays’ Naoya Oshikubo, adds. “That would lead to speculation of a prolonged period of current monetary policy.”

Right. And it’s entirely possible that this could be a goldilocks-type situation for shares. The persistent threat from North Korea will still be in the back of the market’s mind when it comes to choosing between gold, the franc, and yen on days when havens are bid, with the yen likely taking a backseat by virtue of Japan’s proximity to the threat. But Abe’s hardline stance should help overall sentiment, bolstering equities in the absence of actual war breaking out. Throw in ongoing ETF buying by the BoJ and you’ve got a recipe for Topix-infinity.

We’ll leave you with a quick note on all of this from Bloomberg’s Mark Cranfield:

The Nikkei 225 party may have only just begun, as the 20,000 line is breached on Tuesday. A bullish pulse from global markets, a soft yen, speculation of an early Japan election and supportive technical factors — what more could a Japanese equity bull want? How about retail participation? Well, that’s also making a comeback as volume on the Nikkei 225 leveraged index ETF is exploding.

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