Japan’s Stock Market Divide: Large Caps Soar While Smaller Firms Lag

Tokyo, Japan – February 20, 2026 – Japanese stock markets are experiencing a notable divergence, with large-cap stocks benefiting from the “Takaichi trade” while smaller companies and startups are increasingly left behind. This trend is highlighted by performance across the Tokyo Stock Exchange’s Prime, Standard, and Growth markets, signaling a growing gap in investor interest and capital flow.

The “Takaichi Trade” and its Impact

The surge in large-cap stock performance is largely attributed to the “Takaichi trade,” named after Prime Minister Sanae Takaichi. Following her landslide victory in the Lower House election, investors have responded positively to the prospect of increased government spending, tax relief, and a more assertive economic agenda [Reuters]. This has driven the Nikkei 225 and Topix averages to record highs [PressReader], with the Nikkei 225 crossing 58,000 for the first time [CNBC].

Smaller Companies Struggle to Keep Pace

Despite the overall market rally, smaller Japanese companies are struggling to attract the same level of investment. Money is flowing into bigger, more liquid shares, leaving startups and companies with smaller market values sidelined [Nikkei Asia]. This disparity is similarly influenced by concerns surrounding artificial intelligence (AI) and its potential impact on various sectors.

Governance Reforms as a Tailwind for Large Caps

Beyond the “Takaichi trade,” governance reforms are also contributing to the success of larger companies. These reforms are enhancing investor confidence in blue-chip stocks, making them even more attractive compared to their smaller counterparts [Nikkei Asia].

Investor Sentiment and Market Fragility

While the market has experienced significant gains, some analysts caution that the rally may be fragile. The current gains are not necessarily driven by underlying economic strength, raising concerns about a disconnect between stock prices and economic fundamentals [CNBC]. The market remains vulnerable to currency fluctuations, global economic shocks, and a widening gap between prices, and fundamentals.

Foreign Investment Surge

Despite the concerns, foreign investors have been actively buying Japan stocks, with the highest level of purchases in 11 years recorded recently, coinciding with the election high [Nikkei Asia].

The Japanese stock market’s current trajectory presents a complex picture of opportunity and risk. While the “Takaichi trade” continues to fuel gains for large-cap stocks, the struggles of smaller companies highlight the uneven distribution of benefits within the broader economic recovery.