The "Takaichi Sanae rally" is showing signs of cooling down.

At the beginning of this week, following Takaichi Sanae's election victory, the Nikkei 225 Index surged over 4% at one point, marking the largest single-day gain in months. However, the upward momentum has gradually subsided over subsequent days, entering a consolidation phase.

Meanwhile, "theme stocks" related to Takaichi Sanae's policies, after recovering from previous declines, are also showing signs of losing steam.

According to a report released by Nomura Securities on October 9, the core driver behind the market rally following Takaichi Sanae's victory stems from expectations of fiscal expansion rather than monetary easing. The sustainability of this "Takaichi rally" hinges not on economic policies themselves, but on whether the new government can maintain high approval ratings and political stability. Otherwise, historical reversal patterns may repeat.

Market dynamics reflect investors' cautious sentiment. Speculative investors such as Commodity Trading Advisors (CTAs) have built long positions in Japanese stocks exceeding 2 trillion yen, limiting room for further accumulation and shifting into "standby mode." Macro hedge funds have also paused their Japanese equity accumulation, indicating that incremental capital inflows may be limited in the near term.

Nomura's report emphasizes that future market direction will be determined at the political level. If new leader Takaichi Sanae can form a stable government and maintain high approval ratings, related stocks may continue their upward trajectory driven by overseas investors. Conversely, if political instability emerges, these stocks could likely repeat historical reversal patterns, particularly high-volatility stocks.

**Expectations Retreating, Rally May Struggle to Continue**

The initial momentum of the "Takaichi rally" faces risks of dissipation. Nomura analyst Yoshitaka Suda points out that the current Japanese stock market rise driven by fiscal expansion expectations bears similarities to Germany's situation in March this year. At that time, Germany outperformed other developed markets for approximately two weeks due to fiscal policy adjustments, but the rally subsequently fizzled out.

The report suggests that Japan's expectation-driven stock market rally will likely weaken over time. The market has not shown overheating signs similar to the early stages of "Abenomics."

Nomura indicates that for Japanese stocks to gain further upward momentum, more concrete and visible progress may be needed, such as the formation of a governing coalition between the Liberal Democratic Party and the Democratic Party for the People (LDP-DPP), or at least policy coordination toward such an alliance.

**Speculative Forces Pause, CTAs and Hedge Funds Halt Momentum Chasing**

From a capital flow perspective, speculative investors have shifted from active buying to watchful waiting. Nomura's model estimates that CTAs' net long exposure in Japanese stocks exceeded 2 trillion yen last week, significantly limiting their potential for further net purchases at this stage. The report expects that unless the Nikkei 225 Index falls to around 46,400 points, CTAs will not reverse and exit their long positions.

Meanwhile, macro hedge funds also appear to be taking a breather, pausing their accumulation of long positions in Japanese equities. This is partly based on assumptions that the Bank of Japan will continue its interest rate hiking path to prevent excessive yen depreciation.

In foreign exchange markets, this week's yen weakness appears mainly driven by investors unwinding long yen positions. Nomura's analysis shows that speculators have not yet fully shifted toward long USD/JPY positions, and yen carry trades remain in a "subdued" state. This suggests that despite the stock market rebound, investors remain reserved about fully embracing a risk-on mode.

**Learning from History: Reversal Risks After Political Honeymoon**

Historical data provides important reference points for the future trajectory of "Takaichi theme stocks." Nomura conducted an event study of market performance following new government formations since Koizumi Junichiro's administration in 2001, revealing clear patterns.

First, within one to two weeks following House of Representatives elections or LDP presidential elections, theme stocks related to new leaders' policies typically outperform the broader market. Second, these stocks often experience reversal declines over the subsequent three months.

However, this pattern has two notable exceptions: the Koizumi Junichiro government and Abe Shinzo's second administration. After initial strong performance, related stocks entered plateau phases lasting two to three months before outperforming the market again. The report notes that both exceptions shared the common characteristic of governments maintaining solid high approval ratings.

Based on historical analysis, Nomura believes that Takaichi Sanae's government approval ratings will be the core determinant of related stocks' fate. If new leader Takaichi Sanae can form a stable government and maintain high approval ratings, related theme stocks may replicate the sustained upward momentum of the Koizumi and Abe eras, led by overseas investors.

Conversely, if Japanese politics, particularly Takaichi's leadership position within the party, becomes unstable, the market will likely repeat patterns seen during most past government tenures—theme stocks experiencing reversals, with high-volatility stocks showing particularly significant declines.