Asian markets rose sharply on Monday as investors reacted to a decisive political victory in Japan and a late rally on U.S. equity markets. Tokyo led regional gains after Prime Minister Sanae Takaichi's decisive win raised hopes for greater fiscal stimulus and tax relief, while strong performances in chip stocks added momentum across the region.
Japan's Nikkei index climbed 4.2% to reach record highs, reflecting investor expectations that the government’s clear majority will enable a package of spending increases and tax reductions. The prospect of lower consumption taxes and larger defence budgets helped buoy sentiment.
"Cutting the consumption tax on food is a positive for domestic consumption spending; increased military spending is a positive for defence stocks," said Jamie Halse, managing director at Senjin Capital in Sydney. "The real question is what other measures may be possible now with the huge mandate granted by gaining a two-thirds majority. The voters have clearly endorsed Sanaenomics, so it is possible further measures may be announced."
Elsewhere in the region, MSCI's broadest index of Asia-Pacific shares outside Japan increased 1.0%. South Korea's tech-heavy index jumped 3.9% as traders leaned into semiconductor names and related technology exposure.
U.S. equity futures gained ground, with S&P 500 futures up 0.4% and Nasdaq futures rising 0.6%. Both contracts followed a rebound in New York on Friday when major indexes recovered after an extended run of losses.
The semiconductor sector provided a large portion of the market lift. Nvidia rallied nearly 8%, Advanced Micro Devices rose more than 8%, and Broadcom added 7%. The strength in chip stocks came as investors weighed which companies will capture returns from the large volumes of spending directed toward artificial intelligence and related infrastructure.
Analysts at BofA noted a shift in market positioning, writing: "Investors are sensibly rotating from AI spenders to beneficiaries, services to manufacturing, U.S. exceptionalism to global rebalancing. We are long Main St, short Wall St." At the same time, some market participants voiced caution over the sizable capital commitments to AI and the uncertainty about which firms will ultimately profit.
U.S. data to test Fed rate-cut expectations
Market momentum depends in part on incoming U.S. economic releases this week. Investors are looking for a set of readings that are weak enough to keep the case for Federal Reserve rate cuts alive, but not so weak as to imperil consumer demand and corporate earnings.
Forecasters expect payrolls to rise by 70,000 in January, leaving the unemployment rate unchanged at 4.4%. Annual payroll growth for 2025 is also anticipated to be revised lower. Retail sales are projected to increase by a modest 0.4%, while both headline and core consumer price inflation are forecast to slow to 2.5% in January.
Should data undershoot expectations, Treasury yields and the dollar would likely come under downward pressure. Those moves could interact with already stressed currency positions in other markets, notably the yen and the pound.
Currency and bond market reactions
Investors have been selling the yen and Japanese government bonds in advance of the debt-funded expansionary measures now possible under the new government majority. The dollar was trading around 157.22 yen, below a recent high of 159.45. Market participants expect that a move toward the 160.00 level could prompt Tokyo to threaten intervention.
The euro held steady at $1.1810 after trading in a narrow range recently, while sterling was around $1.3597 amid political uncertainty in the U.K. Speculation over the future of Prime Minister Keir Starmer intensified after his chief of staff, Morgan McSweeney, resigned, taking responsibility for recommending Peter Mandelson as ambassador to the U.S. despite Mandelson's reported links to Jeffrey Epstein.
Ruth Gregory, deputy chief UK economist at Capital Economics, said: "Should Starmer be replaced, gilt yields initially rise and the pound weakens. The most likely longer-lasting influence is a loosening in fiscal policy that leads to higher gilt yields than otherwise and a weaker pound than otherwise."
Commodities and energy
Commodities exhibited notable volatility. Silver surged 2.4% to $79.82 an ounce on the day after swinging dramatically the prior session, when it moved from a 15% intraday loss to a 9% closing gain. The metal had fallen sharply over the previous two weeks as leveraged positions were squeezed, triggering margin calls and forced liquidation.
Gold was up 1.5% at $5,033 an ounce, recovering from an intraday low of $4,403 recorded at one point last week.
Oil prices remained unsettled as markets monitored U.S.-Iran talks and the ongoing risk of military escalation. Brent crude eased 0.8% to $67.52 a barrel, while U.S. crude fell 0.7% to $63.09 per barrel.
What market participants are watching next
Investors are focused on whether this week's U.S. economic data will validate expectations for Federal Reserve rate cuts by mid-year, a view that is increasingly seen as the market baseline. The combination of Japanese fiscal policy shifts, strength in semiconductor equities, and large planned capital expenditures by major U.S. technology companies continues to shape allocation decisions across regional equity markets and commodity trades.
At the same time, currency and sovereign bond reactions to policy shifts and political developments in Japan and the U.K. remain important potential drivers of market volatility.