Seemingly counter-intuitively, Japanese stocks surged higher after prime minister Yoshihide Suga announced on 3 September his intention to step down with the Nikkei 225 index gaining 2% and the broader Topix index making new all-time highs.

There are two reasons why investors took the news positively. Firstly, Suga’s approval rating had deteriorated badly amid his handling of the pandemic. Therefore, declaring that he would not run for re-election as party leader ahead of a general election due later this year made way for more popular candidates with better chances of the ruling Liberal Democratic party retaining power.

Secondly, Suga’s resignation increased the chances of further government stimulus on top of the existing $3 trillion package. A strong earnings season also provided a positive financial backdrop to the politics.

Japan-focused funds have benefited from the positive momentum with Fidelity Japan Smaller Companies Fund (FUND: B73VMD59) up 5.5% over the past week and the Amundi Index Japan ETF (JARI) gaining 4.2%.

In the investment trust world, shares in the Fidelity Japan Trust (FJV) were up 9.5% while the Baillie Gifford Japan Trust (BGFD) advanced 5%.

Adding to the excitement for investors in Japan is news that three of the country’s biggest companies will shortly join the widely followed Nikkei 225 index on 1 October.

The index is one of a handful which calculates index constituent weightings according to share price rather than the more conventional market value. The Dow Jones in the US is another popular index which follows the same approach.

The methodology for the Nikkei has been adjusted so that each new addition will have a capped weighting of 1%. The potential issue was that the relatively high share prices of the three companies set to join would have unduly increased volatility of the index.

The three companies joining the Nikkei are video games console maker Nintendo, robotics manufacturer Keyence and electronic component manufacturer Murata, which supplies global smart phone manufacturers including Apple.

Keyence is the second largest company in Japan by market value at approximately £109 billion while £43 billion Nintendo is one of the best-known brands in the world.

The three companies have a combined market cap of £192 billion, which is roughly equivalent to the combined market value of Unilever (ULVR) and Diageo (DGE).

By including these Japanese heavyweights, the Nikkei 225 will become more representative of the Japanese economy and in turn provide investors with more diversity.

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