Japan’s new leadership prods investors to take expansionary bets
[TOKYO] The rapid rise of Sanae Takaichi as Japan’s new leader has galvanised investors, who have pushed stocks to all-time highs while dumping long-dated government bonds and selling the yen.
Markets are now bracing for tests next week as the Bank of Japan (BOJ) meeting and US President Donald Trump’s visit to Japan set the agenda for investors.
Since the fiscally prudent Shigeru Ishiba said he would step down as prime minister, the Nikkei 225 Index has risen 15 per cent, beating the S&P 500 Index’s gain handily, as investors priced in a more free-spending successor.
Takaichi has pledged to spend more on defence, tech, cybersecurity and nuclear energy, sending a basket of stocks that would benefit from a Takaichi administration up more than 10 per cent since the Liberal Democratic Party (LDP) election that chose its new head, outperforming the broader Topix index.
The emergence of Takaichi pushed up longer-dated bond yields to multi-year highs and dragged the yen to an eight-month low versus the US dollar.
Investors are now questioning the longevity of the LDP’s new coalition with the Japan Innovation Party (Ishin) after the rupture of a 26-year alliance with its old partner, the Komeito, and its ability to govern effectively in a fractured parliament.
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“There’s still a lot of uncertainty, and given the coalition dynamics, it is hard to have conviction on where things will go both on the fiscal front as well as on the pace of BOJ normalisation,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore.
Takaichi has unveiled a package of economic measures aimed at easing the burden of inflation, while not specifying the size of the package or indicating whether additional bond issuance would be needed to finance it. She has also played down her comments from a year ago in which she said an interest rate increase by the BOJ would be “stupid”, but concerns remain.
“If the new coalition leans into stimulus and the BOJ stays gradual, stocks can keep an upper hand with a weaker yen as tailwind. But any coalition friction or a quicker BOJ normalisation would flip the script and likely bring a stronger yen, or even a pause in the Nikkei’s momentum and more JGB volatility,” Chanana said.
The so-called Takaichi trade saw double-digit returns for the Japan Defense Basket, an index compiled by Goldman Sachs. Arms manufacturer Mitsubishi Heavy Industries is the fourth-largest contributor to the index’s rise.
“The LDP’s coalition with Komeito had tended to act as a hurdle to expanding the defence budget. But now that the party has joined forces with Ishin, whose views are much more closely aligned with Takaichi’s on defence policy, that constraint appears to have eased,” said Yugo Tsuboi, chief strategist at Daiwa Securities Co, who remains bullish on defence stocks.
Sectors such as construction have outperformed as rate hike expectations waned. Brightening nuclear energy prospects have produced winners such as Tokyo Electric Power Co.
The speed of the recent market rally has made some investors cautious.
Stefan Rittner, portfolio manager at Allianz Global Investors, maintains an overweight stance on Japanese equities albeit with put options to hedge against short-term losses. He says sectors such as consumption and banking might benefit going forward. Such potential rotation would bring relief to shares of banks which have been pressured by dimming prospects of a near-term interest rate hike.
Vanguard Asset Management is looking past the political turmoil in Japan with wagers that stand to profit if the central bank increases interest rates this year and flattens the country’s bond-yield curve. Meanwhile, Amundi predicts that the nation’s 30-year yield could hit a fresh record high in coming months on concern that Takaichi will speed up borrowing.
Taketomo Shimizu, chief investment officer of fixed-income at Asset Management One Co, got rid of his position betting on a flatter yield curve after Takaichi won the leadership election.
“Once the political situation settles down a bit more, and if it starts to look like a rate hike could happen, I think the curve will flatten,” said Shimizu. In order to buy super-long bonds again, “I’m waiting until rate hikes start to feel closer.”
Takaichi appointed Satsuki Katayama as finance minister this week, who is also an advocate of expansionary fiscal policies. The LDP and Ishin said in their agreement that they aim to expand private-public sector investments based on a responsible, expansionary fiscal policy and streamline government operations with thorough spending reforms.
Hideki Shibata, senior fixed-income and foreign-exchange strategist at Tokai Tokyo Intelligence Laboratory, said Takaichi’s reflationary credentials left few reasons to actively buy the yen.
Takaichi’s ascendancy has already had markets paring back expectations of a rate hike by the BOJ next week.
Investors are now monitoring how she navigates relations with the US, and her chemistry with Trump as his trip to Japan gets under way next week.
“With the tariffs issues broadly stable for now, there should be increased attention on Japan’s commitment to invest in the US,” said Sean Callow, a senior FX analyst at InTouch Capital Markets in Sydney.
“Can Japan satisfy the US’ demand without causing significant damage to the yen? And does Trump have thoughts on yen weakness?” BLOOMBERG
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