As Sanae Takaichi, widely regarded as a protégé of the late Prime Minister Shinzo Abe, secured victory in the ruling party's leadership election, Japanese financial markets are rapidly repricing for a potential return of "Abenomics."
With Takaichi poised to become Japan's new Prime Minister, markets anticipate she will revive an economic agenda centered on massive fiscal stimulus and ultra-loose monetary policy, quickly igniting Japanese equities and triggering volatile movements in currency markets.
Following Monday's Tokyo market opening, the Nikkei 225 index surged over 4%, marking its largest single-day gain in months, while the TOPIX index climbed 3%.
Simultaneously, the yen weakened dramatically by 1.5% against the US dollar, approaching the closely watched critical level of 150. The yen against the euro has already fallen to historic lows.
Bond markets also experienced severe volatility, with concerns over future fiscal expansion driving long-term interest rates higher. Japan's 40-year government bond yield spiked as much as 14 basis points to 3.52%.
These movements reflect investors actively positioning for the so-called "Takaichi trade." Markets broadly expect that Takaichi's advocacy for fiscal expansion and right-leaning political stance positions her as a disciple of the late Prime Minister Abe. She has called for maintaining loose monetary policy and believes the Bank of Japan should not raise interest rates.
Traders suggest that a return to the Abenomics era could further weaken the yen, boost equity markets, and lead to substantial increases in long-term Japanese government bond yields. According to Bank of America Merrill Lynch strategists' analysis, Takaichi's victory could result in yen weakness and a steepening of the Japanese government bond yield curve.
**Policy Blueprint of the Abenomics Successor**
On October 4th local time, the results of Japan's ruling Liberal Democratic Party presidential election were announced, with Sanae Takaichi defeating multiple competitors including Shinjiro Koizumi to successfully win election as the LDP's new president.
Takaichi's economic policy positions bear distinct hallmarks of "Abenomics." At her post-election press conference, she promised to swiftly implement measures to address inflation, with policy options including increased subsidies to local governments and not ruling out lowering the consumption tax.
Regarding monetary policy, Takaichi's stance is more explicit. She advocates that the government and Bank of Japan need to maintain consistency in economic policy and communicate closely until achieving demand-driven economic growth.
She previously called Bank of Japan interest rate hikes "foolish," a strong statement that has already prompted some analysts to revise their expectations for BOJ rate increases in October.
**Markets Betting on Fiscal Expansion and Loose Monetary Policy**
Takaichi's victory came as a surprise to many investors who had previously expected the more fiscally conservative Shinjiro Koizumi to win.
Anna Wu, cross-asset investment strategist at VanEck Australia, told Bloomberg this "could be a positive surprise for equity markets."
Investors are preparing for potential fiscal expansion in Japan.
A senior broker at a major Japanese securities firm revealed that "the 'Takaichi trade' is basically favorable for stocks, but JGB and FX markets could see some volatility due to the risk of substantial new fiscal stimulus."
Markets believe Takaichi will prioritize economic growth over strict fiscal discipline.
**Bond Markets Under Pressure, Yields Expected to Rise**
While equity markets celebrate, bond markets face different pressures. Markets worry that larger-scale fiscal spending means the government will need to issue more bonds, increasing Japan's debt burden.
Mizuho's chief strategist Shoki Omori warned that bonds could face selling pressure if policies to increase JGB issuance lack accompanying "safety nets." This view aligns with Bank of America Merrill Lynch's forecast that the Japanese government bond yield curve could become steeper.
For investors, Takaichi's rise to power opens a new trading paradigm. Markets will closely watch how she balances promises to stimulate growth with the long-term challenge of controlling government debt, and how she will influence the Bank of Japan's future policy path.
