(Bloomberg) -- Japanese stocks rallied to fresh record highs on Monday after a resounding election win by Prime Minister Sanae Takaichi’s ruling party, and the yen edged away from the danger zone for intervention.

Declines in government bonds were limited, defying concern that the debt market may erupt again as it did last month. The relative calm in the currency and fixed income markets came after Takaichi emphasized fiscal sustainability and her finance minister warned that she was watching movement in the yen.

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The Nikkei 225 Stock Average surged 4.4% and the Topix gained around 2.3%. The yen climbed 0.2% to 156.85 against the dollar. Gains in bond yields, especially those on longer tenors, were relatively muted.

“The strong election results for Takaichi are a medium- to long-term positive for Japan equities,” and will set stocks up for a continued rally, said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “The challenge will be the behavior of JGBs,” given that sharply higher long-term yields would create a headwind for Japanese markets.

The Liberal Democratic Party secured a two-thirds super majority in the 465-seat lower house by itself, according to public broadcaster NHK, and the ruling coalition expanded its majority by a wide margin. This paves the way for Takaichi to pursue expanded fiscal spending plans and investment to support the economy.

Semiconductor-related sectors and defense companies were the largest contributors to the advance in the Topix index, with the so-called Takaichi trade in focus. That trade has been characterized by buying Japanese stocks, and selling bonds and the yen on expectations Japan’s premier will pour money into the economy and increase debt to pay for that.

Chip equipment maker Advantest Corp. was the biggest gainer in the Nikkei, and was one of the top performers on the Topix, rallying as much as 15%.

“Large caps will outperform, including banks, defense related and blue-chip exporters” such as Toyota Motor Corp., said Mateen Chaudhry, founder and managing director of BCMG. However, Takaichi needs to “remain measured in what she says, or we could see another wave of volatility in the bond and currency markets.”

The yen has pulled back from a zone around 160 versus the greenback that has previously drawn Japanese authorities into the market to defend the currency.

What Bloomberg strategists say:

The use of the phrase watching with a is typically seen as a strong message with the risk of actual intervention not far behind.

However, FX traders will need more convincing to become serious buyers of the yen. A few more hawkish Bank of Japan comments to set up an early rate hike will carry more weight.

Mark Cranfield  Markets Live Strategist. Read more on MLIV.

Japan’s chief currency official Atsushi Mimura told reporters that he’s watching markets with a high sense of urgency, as always.

The yield on the 30-year government bond fell half a basis point to 3.545%, after initially rising as high as 3.615%. The yield on the benchmark 10-year note was 4 basis points higher at 2.27%.

The relatively subdued moves eased concerns about the risk of further selling for Japanese bonds, which plunged in January and sent shockwaves through global markets.

“JGB yields will undergo some volatility, but a large move will fuel the expectation of a market stabilization measure from the government,” said Homin Lee, senior macro strategist at Lombard Odier. “We do not rule out the risk of foreign pressure if JGB yields rise too much and start pressuring other government bonds like US Treasuries.”

Global money managers including Schroders Plc and JPMorgan Asset Management headed into election underweight JGBs, particularly at the super-long end. Takaichi’s proposal to temporarily cut the sales tax on food and renewed concerns over Japan’s fiscal sustainability were among key drivers of the selloff, alongside poor liquidity.

Japanese Finance Minister Satsuki Katayama tried to reassure markets on Monday, saying that the planned tax cut wouldn’t require additional bond issuance. In TV appearances Sunday, she reiterated that she was keeping in close contact with US Treasury Secretary Scott Bessent. She said she shares with Bessent responsibility for maintaining stability in the dollar-yen movements.

At the same time, some market players said that Takaichi’s decisive win meant that she may in fact feel less pressure to deliver stimulus.

“While this result heightens tension for bond market participants, the LDP’s landslide victory could give Prime Minister Takaichi the political leeway to listen to the bond market’s concerns,” said Masanari Takada, quantitative and derivatives strategist at JPMorgan Securities Japan Co.

Overnight index swaps and yields on short-dated bonds have been adjusting to views that the BOJ may increase interest rates by its April meeting. A 25-basis-point move by the BOJ is about 75% priced in for that gathering, and fully priced in by June.

“A landslide victory usually brings policy clarity and reduces near-term political noise, so my base case would be a Nikkei upside,” said Charu Chanana, chief investment strategist at Saxo Markets. “But it’s still going to be messaging-dependent — the market will cheer stability, but it won’t cheer a new dose of fiscal uncertainty that re-ignites the bond selloff.”

--With assistance from Anthony Stephens, Masahiro Hidaka, Hidenori Yamanaka, Mia Glass, Mark Tannenbaum, Hideyuki Sano, Alice French, Momoka Yokoyama and Kentaro Tsutsumi.

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