Japanese shares rallied sharply on Monday, leading gains across Asia, after the U.S. and China agreed to a temporary truce in their protracted trade dispute. The Nikkei 225 index climbed 2.3% to close at a record 41,230, surpassing its previous peak set earlier this year. The broader Topix index rose 1.8%, as investors priced in expectations of greater trade stability and renewed momentum in global growth.

The yen weakened to ¥152.10 per U.S. dollar, reflecting improved risk sentiment, while technology and automotive exporters—sectors highly sensitive to trade flows—recorded the strongest gains. “The easing of geopolitical friction has given traders confidence that supply chains may stabilize into 2025,” said Hiroshi Matsumoto, chief strategist at SMBC Nikko Securities.

Regional Rally Signals Broader Market Confidence

Asian equities broadly advanced in tandem with Japan’s surge. Hong Kong’s Hang Seng Index gained 1.5%, buoyed by property and tech names, while South Korea’s Kospi added 1.2%. Mainland Chinese shares posted modest increases as investors interpreted the truce as a sign that Beijing could recalibrate its stimulus strategy with greater policy clarity.

Despite skepticism about the durability of the agreement, markets responded to the symbolic pause in trade hostilities. “This truce is not a resolution, but it resets sentiment,” noted Takashi Ito, an equity strategist at Nomura Securities. “Investors are taking this as an opportunity to rotate back into cyclicals and risk assets that were under pressure through much of the year.”

Japan’s Economic Backdrop Strengthens the Rally

The market’s momentum also reflects Japan’s improving fundamentals. Core inflation remains stable near the 2.7% target, while capital investment and wage growth are both trending higher. These data points reinforce expectations that Japan’s recovery can withstand external shocks.

At the same time, international investors have increased their exposure to Japanese equities as an indirect play on Asia’s manufacturing rebound—without the direct regulatory risks associated with China. Foreign inflows into Tokyo-listed equities have risen for eight consecutive weeks, the longest streak since 2020.

Still, analysts caution that the Nikkei’s valuation has reached its most expensive levels in decades, leaving limited room for earnings disappointment. The index’s price-to-earnings ratio now exceeds 22, compared to a 10-year average of 16.

What Comes Next for Investors

Attention now shifts to policy signals from the Bank of Japan (BOJ) and the Federal Reserve, which could determine whether the rally sustains through year-end. Any hint of BOJ tightening or a stronger yen could dampen the current enthusiasm.

For now, investors appear content to ride the wave of optimism spurred by the Trump-Xi détente. Yet, with global trade politics and monetary policy still in flux, market participants will need to stay agile—balancing near-term gains against the persistent risk of renewed geopolitical volatility.