Japan snap election bets push stocks to record highs, sink yen and bonds

By Kevin Buckland and Rocky Swift

TOKYO, Jan 13 (Reuters) - Japan's Nikkei index surged to a record on Tuesday, while the yen sank to an all-time low against the euro and Swiss franc, as investors bet on more fiscal stimulus amid reports that the government may call a snap election next month.

Japanese government bonds tumbled, pushing up yields on 20-year paper to a record.

The Nikkei .N225 jumped as much as 3.6% to a record intraday level of 53,814.79. The gauge finished 3.1% higher at an all-time closing mark of 53,549.16. The broader Topix .TOPX also set an intraday peak and closed up 2.4%.

Local media reported on Tuesday that Prime Minister Sanae Takaichi plans to dissolve parliament when it reconvenes on January 23, setting up a general election as soon as February 8.

"It's widely believed in markets that if Takaichi dissolves parliament, the result will be a weaker yen, higher equities and lower bond prices," and based on the idea that "early elections mean proactive fiscal spending," said Maki Sawada, an equities strategist at Nomura Securities.

A public holiday on Monday augmented the buying, as Japanese equities caught up with Wall Street's two-day rally to record highs.

Sentiment was also supported by a rapid decline in the yen since the end of last week, as a softer currency increases the value of overseas earnings at Japan's heavyweight exporters.

The yen tumbled to an unprecedented 185.38 per euro EURJPY= and 199.29 per Swiss franc CHFJPY= on Tuesday, and dropped to a 1-1/2-year low of 158.98 per U.S. dollar JPY=.

Yields on the longest-dated JGBs jumped on Tuesday, with the 20-year yield JP20YTN=JBTC spiking 8.5 basis points (bps) to hit an unprecedented 3.14%, and 30-year yields JP30YTN=JBTC surging 12 bps to match a record peak of 3.52% seen last week.

So-called superlong bonds are most sensitive to the fiscal outlook. Yields rise when bond prices fall.

The 10-year yield JP10YTN=JBTC climbed 7 bps to a 27-year high of 2.16%.

On Sunday, the head of coalition partner Ishin told national broadcaster NHK that he met with Takaichi on Friday and left with the impression an imminent election was a possibility.

It would be the first time for Takaichi to face voters, giving her a chance to capitalise on the strong public approval ratings she has enjoyed since taking office in October.

"If concerns about fiscal expansion grow during the campaign, long-term yields could tend to come under upward pressure, at least temporarily," Barclays economists Naohiko Baba and Takashi Onoda said.

"That said, a weaker JPY and rising long-term yields could end up restraining the Takaichi administration's proactive fiscal policy."

Transport equipment .ITEQP.T, which includes automakers and their suppliers, was the best performer among the Tokyo Stock Exchange's 33 industry groups on Tuesday, with a 5.1% jump.

Toyota Motor 7203.T surged 7.5% and Subaru 7270.T gained 4.1%.

On the Nikkei, semiconductor-sector shares outperformed. Chip-testing equipment maker Advantest 6857.T soared 8.5% and chip-making tool manufacturer Tokyo Electron 8035.T vaulted 8.2%.

Of the Nikkei's 225 components, 180 advanced, 43 declined and two traded flat.