A well-worn market dynamic is resurfacing in Japan, as a weakening yen once again coincides with a powerful rally in domestic equities.

As the Japanese yen slides to its lowest level since July 2024, domestic stocks are doing exactly the opposite—smashing record highs.

Currency Sinks, Stocks Fly: Japan Repeats A Familiar Trade

The yen weakened past the 159 level against the U.S. dollar on Tuesday, pressured by rising political uncertainty and speculation that Prime Minister Sanae Takaichi could dissolve parliament as early as next month.

Takaichi, who maintains strong public approval, is widely viewed as favoring expansionary fiscal policy—an outlook that markets have quickly translated into renewed yen weakness.

At the same time, Japanese equities surged. Futures on the Nikkei 225 rallied 3.1% to close at fresh record highs, extending a rally that has been fueled by exporters and financials benefiting from the softer currency.

Toyota Motor Co. (NYSE:TM), the largest Nikkei component, surged more than 7% in Tokyo trading. Mitsubishi UFJ Financial Group Inc. (NYSE:MUFG), the second-largest holding, gained over 5%.

Since the start of the year, the iShares MSCI ...