Political uncertainties boost the enthusiasm for the Japanese stock market; hidden liquidation risks behind the 54,000-point level

Japanese stock market remains hot. The Nikkei 225 index hit a new all-time high for the second consecutive day, closing at 54,341.23 points, breaking the 54,000-point mark for the first time, with a daily increase of 1.48%. The driving force behind this rally is the expectation that the Japanese government may hold early elections. However, behind the shiny new high, technical risks have already been brewing.

Political Expectations Become a New Driving Force

News of an early general election in Japan continues to ferment, becoming the main catalyst for the Nikkei index’s consecutive gains. This political variable has a fairly direct stimulative effect on the stock market—investors are optimistic about potential policy adjustments and economic prospects. Meanwhile, the yen and bond markets are showing declines, with the USD/JPY hovering above the 159 level, rising slightly by 0.14%. This asset correlation reflects that investors are rebalancing risk assets while also adjusting their expectations for Japan’s monetary policy.

Technical Support and Risks Coexist

From a technical perspective, the strong rise of the Nikkei index is not an isolated phenomenon. According to the latest CTA fund holdings report from U.S. banks, CTA funds with medium- to long-term trend signals still maintain large long positions in European and Japanese stocks. This indicates that trend-following funds’ continued buying is supporting the upward movement.

Critical Point for Liquidation Risk

More concerning is that the market has begun to assess liquidation risk. The report estimates that the Nikkei needs to fall at least 3.5% to trigger the first liquidation signal. This number may seem small, but for an index already at a historical high, it signifies that risks are accumulating. Currently, the stock market hovers near record highs, and the short-term risk of liquidation is relatively low. However, this also highlights the market’s fragility—once the liquidation conditions are triggered, concentrated stop-losses by CTA funds could accelerate the decline.

Dual Nature of Technical Support

This presents an interesting paradox: the large long positions held by CTA funds are both a support for the stock market’s rise and a potential source of risk. When the trend is upward, these funds continue to follow; but once the trend reverses, they will quickly close positions, potentially creating a self-reinforcing downward cycle.

Future Observation Focus

In the short term, whether the Nikkei can continue to rise depends heavily on whether political expectations can be sustained. In the medium term, close attention should be paid to how far the index is from the 3.5% liquidation risk line. If the election expectations dissipate or market sentiment shifts, the behavior of CTA funds could become a trigger for accelerated declines.

Summary

Behind the new high of the Nikkei lies a combination of political variables and technical support, but this combination itself is fragile. Political expectations may temporarily push stocks higher, but concentrated positions held by CTA funds mean risks are building. The market has a buffer of 3.5% before reaching the first liquidation risk line, but this buffer is particularly narrow at record highs. For investors, enjoying the rally while preparing for potential rapid adjustments is essential.