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Japan’s stock market soared to record highs following Sanae Takaichi’s victory in the Liberal Democratic Party leadership race, signaling investor optimism toward her pro-growth fiscal stance. The yen tumbled while long-term bond yields rose, reflecting expectations of higher government spending and a potential delay in Bank of Japan tightening. The result marks both a historic political moment—Japan’s first female leader—and a pivotal shift in economic expectations.
Market Rally Signals Embrace of “Sanaenomics”
The Nikkei 225 index jumped over 4% to hit a record high Monday, closing 4.75% higher at 47,944.76, as investors celebrated Takaichi’s unexpected victory over farm minister Shinjiro Koizumi in Saturday’s runoff election. The benchmark gained over 4% right after the opening bell and reached an all-time high of 48,150.04 in the afternoon, beating the previous record of 45,852.75 reached on September 19.
The surge represented the biggest single-day percentage gain in six months, with real estate, technology, and consumer cyclical stocks leading the advance. Heavy machinery giants and electronics manufacturers posted particularly strong gains, with Mitsubishi Heavy Industries closing up 11.17%, Advantest gaining 14.02%, and NEC shares rising 12.93%.
Meanwhile, the yen weakened by over 1.81% to hit the psychological mark of 150 against the greenback, reaching levels last seen in August. The currency’s sharp decline raised immediate concerns from Japanese officials, with market participants closely watching for potential intervention if the yen weakens further beyond the 151 mark.
Fiscal Expansion Expectations Drive Bond Market Turbulence
The bond market reflected investor concerns about Japan’s fiscal trajectory under Takaichi’s likely premiership. Japan’s 30-year government bond yield rose to an all-time high on Tuesday, while twenty-year JGB yields marked fresh 26-year peaks and 10-year yields notched 17-year highs. The 10-year yield touched 1.68%, its highest level since July 2008, while the 30-year yield surged to 3.35%.
Goldman Sachs warned that Takaichi’s win presents “upside risks to long-end JGB yields,” calling a 10- to 15-basis-point pop in 30-year yields a plausible first step. The investment bank also cautioned about potential spillover effects, noting that for every 10 basis point “idiosyncratic JGB shock,” investors can expect around two to three basis points of upward pressure on U.S., German and U.K. yields.
Market expectations for Bank of Japan policy shifted dramatically following Takaichi’s victory. Swaps traders rapidly adjusted expectations for a Bank of Japan interest rate hike this month, with market-implied odds dropping to around 25% currently from 37% on Friday, reflecting the view that the new leader will favor maintaining accommodative monetary conditions.
Revival of Abenomics Under a New Banner
Takaichi’s economic philosophy draws heavily from her mentor, the late Prime Minister Shinzo Abe, whose “Abenomics” program combined aggressive monetary easing, fiscal stimulus, and structural reforms. Takaichi wants a so-called “high-pressure economy,” using public-private investment and aggressive fiscal support to break Japan’s lingering deflation, according to analysts at Crédit Agricole-CIB.
During her campaign and first press conference as LDP leader, Takaichi signaled plans for broad-based public spending and subsidies to cushion households and key industries from rising costs. Her policy platform indicates sustained support for trade liberalization, including expansion of CPTPP membership and economic partnerships with the European Union.
Mizuho Securities senior technical analyst Yutaka Miura noted that “originally, the market had largely expected that Koizumi would win the race, so it had hardly priced in a chance of Takaichi’s victory. In that sense, it was a positive surprise”. The so-called “Takaichi trade”—characterized by strong stocks and a weak yen—echoed similar market patterns from the previous year’s leadership race when anticipation of her potential victory drove significant market moves.
Historic Political Milestone Meets Economic Pragmatism
The 64-year-old Takaichi makes history as the first female leader of Japan’s long-governing conservative Liberal Democratic Party, with parliament expected to confirm her as prime minister on October 15. While her victory represents a breakthrough in a country that ranks poorly internationally for gender equality, critics note that Takaichi “has no interest in women’s rights or gender equality policies,” according to Yuki Tsuji, a professor specializing in politics and gender at Tokai University.
The new leader faces immediate challenges in forming a government and navigating Japan’s minority parliament. The withdrawal of coalition partner Komeito from the political alliance that has existed since 1999 leaves the LDP with 191 seats in the 465-seat chamber, short of the 233 seats needed for a majority. Despite this setback, analysts believe Takaichi remains on course to become prime minister, as opposition parties remain too fragmented to unite behind an alternative candidate.
Market Sustainability Questions Emerge
While initial market enthusiasm has been pronounced, economists warn that the “Takaichi trade” has its limits. Daiwa Securities chief economist Toru Suehiro noted that “if the yen’s depreciation becomes excessive, public opinion may begin calling for interest rate hikes to stem the yen’s decline”.
The sustainability of Takaichi’s fiscal expansion plans faces scrutiny given Japan’s debt burden, which already exceeds 200% of GDP. Long-time Japan watcher William Pesek warned that “the bond vigilantes are watching, and any effort to open up the fiscal floodgates, if you will, in ways that Takaichi has talked about because she loves Abenomics, is going to unnerve the bond market”.
Global Implications and Investment Flows
The market reaction to Takaichi’s victory extends beyond Japan’s borders. The prospect of more debt-fueled stimulus spending could cause investors to demand higher rates on long-term bonds, which in turn could add more upward pressure on bond yields elsewhere, like the U.S., which relies heavily on Japanese investors as top buyers of Treasury debt.
Foreign investors appear to be driving much of the equity market rally. Neil Newman, head of strategy at Astris Advisory Japan, noted that “judging by the number of stocks that moved and which stocks moved, it seems like pretty much led by foreigners so far”.
As Japan prepares for its first female prime minister, markets are betting that Takaichi’s blend of fiscal activism and monetary accommodation will reignite the world’s fourth-largest economy. However, the ultimate success of her economic agenda will depend on her ability to navigate parliamentary constraints, manage currency volatility, and maintain credibility with increasingly watchful bond investors.
Sources
- Reuters: “Japan’s Nikkei hits record after fiscal dove Takaichi’s election win”
- Financial Times: Market analysis and bond vigilante concerns
- CNBC: “Japan stocks hit record highs as Sanae Takaichi’s LDP victory drives yen past 150”
- The Japan Times: “‘Takaichi trade’ takes Nikkei to record high”
- Goldman Sachs Research: JGB yield spillover analysis
- Bloomberg: “Takaichi Win Jolts Yen and Japanese Bonds, Triggers Stock Surge”
