(Bloomberg) -- Japanese equities are enjoying a knockout start to 2026 as Prime Minister Sanae Takaichi’s growth policies propel stocks from chips to defense to the top of developed market rankings.

The three best performers on the MSCI World Index so far this year are Japanese firms, with chipmaker Kioxia Holdings Corp. gaining almost 120% to top the list. Defense contractor Kawasaki Heavy Industries Ltd. and chip materials producer JX Advanced Metals Corp. are not far behind, both rising more than 60%.

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The world-beating gains are part of a record rally for Japan’s stock benchmarks, with the Topix and Nikkei 225 Stock Average hitting fresh all-time highs this week after Takaichi’s ruling Liberal Democratic Party secured a historic victory in Sunday’s election.

Expectations of more fiscal expansion and political stability under a newly-bolstered Takaichi government have helped drive the Nikkei benchmark up more than 5% since the election, far outperforming the S&P 500’s 1.4% fall through Thursday. Tech, defense, energy and construction have been among the biggest beneficiaries as investors gear up for an influx of government spending under Takaichi’s plan to invigorate “strategic” industries.

“Japan has emerged as one of the standout investment destinations at the start of 2026,’ said Russell Shor, a senior market analyst at trading platform Tradu. “The rally reflects political clarity, renewed confidence in fiscal stimulus, attractive valuations, and improving corporate prospects,” he added. “Investors welcome Prime Minister Sanae Takaichi’s mandate and fresh policy support.”

Goldman Sachs strategists also raised their rating on Japanese stocks to overweight in a Friday report, citing hopes for “a period of political stability” and policy tailwinds for “defense, critical resources, shipbuilding, power resources, US re-industrialization plays.”

Read: Japan Defense Stocks Surge on Takaichi’s National Security Plans

Kawasaki Heavy, MSCI World’s second-best performer so far this year, has rallied 20% in the past week alone, fueled by stronger-than-expected quarterly earnings and expectations that Takaichi will use her new mandate to loosen Japan’s constitutional restrictions on its military capacity. Kawasaki’s peer IHI Corp. is also up more than 50% so far this year, placing it in the MSCI index’s top-10 performers.

Kioxia, which also topped the index in 2025, surged as much as 15% Friday after its full-year earnings forecast beat market estimates. The NAND maker has climbed over 1,000% in the past 12 months amid soaring memory chip prices, driven by insatiable demand from the AI sector.

Read: Kioxia Extends World’s Top Stock Performance as AI Fuels Outlook

JX Advanced Metals, which listed in Tokyo in early 2025, has benefited from a global rally in metal prices and surging AI demand. The same tailwinds have boosted Sumitomo Metal Mining Co., which has gained about 60% year-to-date.

Japan’s record-breaking rally is raising some alarm bells, however. With many upsides already priced in, “risks are building,” warned Tradu’s Shor.

“The margin for disappointment is narrowing, while technical indicators suggest the Nikkei 225 is overbought in the short term,” he said. The Nikkei was down 0.7% as of 12:30 p.m. in Tokyo.

--With assistance from Aya Wagatsuma.

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