RealMoney

Japanese stocks on Thursday hit highs last seen more than two decades ago. Although the moves this week have been incremental, they're also indicative that investors believe the reformist policies of Prime Minister Shinzo Abe are paying off.

The Nikkei 225 benchmark rose to 20,994 in intraday trade on Thursday, its highest level since December 1996, and ended just off that at 20,954. Consumer-goods producers and industrials have driven its gains this year. 

Investors are taking their lead from Wall Street, but are clearly also anticipating a very successful showing from Abe's Liberal Democratic Party in the snap election set for Oct. 22. That would be a vote of confidence in Abenomics after doubts about its effectiveness in driving the Japanese economy out of deflation.

The Topix, a more representative measure of Japanese equities, hit 1,703 during Thursday trade -- a peak it last reached in July 2007 -- and closed at 1,700. Stocks such as Softbank (SFTBF) , which reached a 17-year high on Thursday, have helped propel its advance.

Softbank is reportedly in talks to take a stake of around 15% in Uber Technologies. Buoyed by that and a string of other tech-focused investments, including hefty gains in its holdings in e-commerce giant Alibaba (BABA) , Softbank shares are at their highest level since March 2000, inside the dot.com bubble. Up 27% in 2017, they are still less than half their all-time high set in February 2000.

Japanese stocks are up 12.0% so far this year, as measured by the Topix. It seems only a matter of time before the Nikkei rises above 21,000, which will again grab the limelight, although it's far off its all-time high of 38,915 of December 1989, just before Japan's bubble blew up.

The gains in Japanese stocks should continue under Abe's steady governance. Consumer-focused companies such as makeup maker Shiseido (SSDOY) , drinks company Kirin Holdings (KNBWY) , automakers Suzuki Motor (SZKMY) and Mitsubishi Motors (MSBHY) and the airline ANA Holdings (ALNPY) are all up more than 35% in 2017.

Their performance, together with heavy-industry stocks such as industrial-products producer Tokai Carbon (TKCBY) (up 211% in 2017), fertilizer and chemicals supplier Showa Denko (SHWDY) (up 122%) and metals producer Mitsui Mining & Smelting (MMSMY) (up 104%), the top three Nikkei performers, have driven the index higher. 

Abe's opposition is in total disarray, with the leading contender to take him on, Tokyo Governor Yuriko Koike, choosing not to run for prime minister. That has left voters unsure about casting ballots for her Kibo no To, or "Party of Hope."

Koike, a former TV news host and defense minister (briefly) under Abe, could have offered an alternative to him in terms of personality. But her party is conservative like Abe's, and as of yet has few policies that set it apart. Its main points of differentiation are a call to defer an increase in Japan's sales tax, and possibly Japan's withdrawal from nuclear-power generation.

The Party of Hope's formation spelt the death knell for the Democratic Party that was Abe's previous opposition, with many of its members switching allegiance. Around 40 of the Democratic Party's more-liberal legislators formed the Constitutional Democratic Party of Japan, but the rest defected to the Party of Hope. 

It now appears possible, if not likely, that Abe's coalition of the LDP and smaller Kumeito Party will maintain their two-thirds majority in the Lower House. Opinion polls released on Thursday suggest they will together win more than 300 of the 465 seats on offer.

That's better than expected when Abe called the vote. A two-thirds majority would allow Abe to continue with constitutional reforms such as revising the Japanese constitution to allow it to have a military, rather than "Self-Defense Forces." The Yomiuri Shimbun newspaper even says that the LDP might secure enough seats to go it alone without its more-dovish coalition partner.

A decent Abe margin would put Abe on track to become the longest-serving leader in Japan since World War II. The political spotlight will fall on his efforts to revise Japan's constitution, which in Article 9 stipulates that Japan will never maintain armed forces or other capabilities of war.

But an Abe victory would also promise a continued firing of his three arrows of government spending, an accommodative central bank stance, and structural reform. Reform of Japan's labor laws to allow more immigration, for instance, is necessary to compensate for Japan's ageing and declining population. Any idea of allowing foreign workers into Japan in greater numbers is also highly controversial, requiring substantial political capital to push through.

The Nikkei gets the headlines, much like the Dow Jones Industrial Average, but the Topix is a better measure of Japanese stocks as a whole, like the S&P 500. The Nikkei, up 9.2% in 2017, hasn't fared quite as well as the Topix.

The Topix, or Tokyo Price Index, tracks all stocks on the main board in Tokyo -- in other words, all the sizeable companies in Japan, with only small caps trading on the second section. It is also weighted by market capitalization, meaning Japan's largest companies have more influence over its movements.

The Nikkei covers 225 blue-chip stocks and is price-weighted like the Dow, a system that, to be honest, makes little sense. Its top weighting is fast-fashion store Uniqlo's parent Fast Retailing (FRCOY) , which trades at ¥34,850 per share.

While Fast Retailing is a significant Japanese company, at $32.9 billion in market capitalization, its 6.2% weighting is far above the 1.2% weighting allocated to Toyota Motor (TM) . Toyota is Japan's largest listed company by virtue of a market cap of $201 billion, but trades at ¥6,925 per share.