By Martin Baccardax

Japan was widely considered to be the world's most dynamic and competitive economy in the late 1980s, with its stock market at record highs, its companies towering over American rivals in terms of size and strength, and its technological prowess dominating both the consumer and industrial electronics sectors.

That reign was cut short, however, by policy errors, currency moves, and a hawkish Bank of Japan, leading to a so-called "Lost Decade,"or what the Japanese called "ushinawareta junen," for the world's second-largest economy -- a malaise that it's only now beginning to overcome.

In fact, in some respects, the specter of the end of the last century is alive and well in Japan: stocks are back to record highs, the Bank of Japan is signaling future interest rate hikes to slow inflation, and the nation is getting its mojo back under the leadership of new Prime Minister Sanae Takaichi.

With a 70% approval rating and hopes for an improving economy, Takaichi has decided to seize her moment with another tactic from Japan's halcyon days.

Takaichi plans to dissolve parliament next week, the first January dissolution since 1990, and call a snap election in February that should boost her Liberal Democratic Party's $(LDP)$ control of the government. Full details are expected on Jan. 19, according to the party's Secretary General Shunichi Suzuki.

Takaichi is a lot more popular than the LDP itself, which has a stagnant approval rating of around 30%, so the bet will be whether she can translate that into outright majorities in both the Upper and Lower Houses of Parliament.

The implications are big.

An LDP-controlled chamber could unlock a big boost in government spending, with the fiscal 2026 budget looming later this spring, and add fresh stimulus to the country's uneven GDP growth.

It's also likely to heap further pressure on the yen, which is already trading near the weakest levels on record against the U.S. dollar, and stoke the ongoing rise in Japanese government bond yields, which are trading at the highest since the late 1990s.

Stocks, however, are loving it.

Japan's Nikkei 225 benchmark, a price-weighted index similar to the Dow Jones Industrial Average, hit another record high on Wednesday, topping the 54,000 point mark. It's also risen more than 10% since Takaichi was elected party leader, and named Prime Minister, in late October.

The broader Topix index, which resembles the S&P 500, is up more than 12% over the same timeframe and breached the 3,600-point barrier for the first time ever on Wednesday.

For U.S. investors, yen weakening is a key factor in determining returns.

Buying into the Nikkei on Feb. 22, 2024, when the index finally reclaimed its 1999 record, would have generated an overall return of around 40% as of this week. But converting that back to U.S. dollars reduces the net gain to around 20%.

That's still impressive, but it's largely the same as you would have earned with a passive stake in the S&P 500 over the same period.

The yen also plays a central role in providing excess liquidity to markets around the world, as investors borrow at near-zero interest rates in Japan and put that cash to work in things like U.S. stocks, precious metals, and digital currencies.

This so-called "yen carry trade" has coincided with both big gains for global stocks, and sporadic bouts of volatility as Japanese officials, led by the Ministry of Finance, buy trillions worth of yen in foreign exchange markets to arrest its decline.

Away from stocks, Japan is also the biggest foreign holder of the record $9.2 trillion in U.S. Treasury debt, with around $1.15 trillion invested through its central bank, pension and investment firms. China's holdings, by comparison, are pegged at around $727 billion, the lowest since 2008.

Japan's own bond market, however, is starting to look more attractive: a growing economy reduces debt-to-GDP ratios, and higher government bond yields (tied in part to inflation pressures and central bank rate signals) offer much higher returns than they did just a few years ago.

And with nearly a third of its population at or near retirement age, and in search of steady investment income, a shift from U.S. debt to domestic alternatives wouldn't pass unnoticed in the Treasury market.

Japan's recovery story is a great one, but U.S. policymakers might learn more from its decline, particularly now that President Donald Trump is demanding lower Federal Reserve interest rates, and using debt and deficit funding to "run the economy hot" while seeking government-sponsored entities to boost the housing market.

The U.S. isn't Japan, of course, and few are predicting an echo of its 90s-era ushinawareta junen in the world's biggest economy.

But it's definitely time to start paying more attention to what's happening in Tokyo.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 14, 2026 15:30 ET (20:30 GMT)

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