The Markets Have Reflected the Surprising Victory of Takaichi Sanae as Prime Minister of Japan, With Stock Market Gains, a Boost in Fixed-Income Yields, and a Weaker Yen. Specifically, JGB bonds have continued to rise even as the Nikkei reached a record before Takaichi’s victory, due to the opposition’s call for tax cuts and speculation over rate hikes by the Bank of Japan (BoJ).
“Since she was not the favorite to win, the market had to quickly price in the impact of Takaichi’s policies on fiscal stimulus, industrial policy, and her moderate monetary outlook. The ‘Takaichi effect’ triggered a rise in equities, a weakening of the yen, and a sell-off of long-term bonds. However, some of these reactions may be excessive. The details of Takaichi’s election campaign reveal a more moderate stance on monetary and fiscal easing than the headlines suggest,” says Sree Kochugovindan, Senior Research Economist at Aberdeen Investments.
According to experts, with Takaichi’s rise to power, we could see more movement in financial markets, given her more interventionist stance and her promises to increase fiscal stimulus. “However, large public spending in a country where debt already represents 260% of GDP is something that can spook bond markets — and likely will. Nevertheless, it’s worth noting that most of Japan’s debt is held by domestic investors, which means it is less vulnerable than, for example, the UK’s debt,” warns Anthony Willis, Senior Economist at Columbia Threadneedle Investments.
Willis is struck by Takaichi’s remarks about the BoJ, which she called “stupid” for raising interest rates. “With inflation entrenched in Japan and hovering around 3%, the Bank of Japan is likely to raise rates further from what is currently an 18-year high. However, at 0.5%, they still remain relatively low,” he comments on the country’s monetary policy.
After Her Victory
As for what to expect now, experts see it as likely that equities will continue to rebound while the Japanese yen weakens, given Takaichi’s proposed plan for fiscal expansion and monetary policy easing. “A BoJ rate hike in October now appears to be off the table, as swaps now reflect only a 20% probability of a hike, down from more than 60% last week. However, yen weakness could be limited due to the narrowing of interest rate differentials between Japan and the United States. Realistically, she may still face challenges in pushing through her policies, as the Liberal Democratic Party (LDP) no longer holds a majority in either the upper or lower house of Parliament. Overall, Takaichi’s victory is positive for equities — excluding banks — and we see a more growth-friendly environment for equities,” say Magdalene Teo and Louis Chua, Fixed Income and Equity Analysts, respectively, at Julius Baer in Asia.
In the opinion of John Butler, Macro Strategist at Wellington Management, the new prime minister wants the government to lead fiscal policy while the BoJ simply executes. “Japan needs higher interest rates: it has to manage 5% nominal growth, which is above its long-term trend, and unemployment is at historic lows. The yen is being affected because real rates are now very low and the new government wants to implement an expansionary fiscal policy. I believe Japan is a great inflation story, and this is good for risk assets, particularly Japanese equities. However, all the risk now lies with the BoJ: it might raise rates if the yen goes to 1.5, but that would be a defensive move. It could raise rates in October, though I see December as more likely,” he explains.
Experts at Julius Baer acknowledge that Takaichi’s victory has brought to the forefront the policies proposed in her campaign, which are built on three pillars: managing national crises and economic growth, expansive fiscal policy, and her belief that the government is responsible for monetary policy while the Bank of Japan (BoJ) autonomously chooses the best tools. “With her leadership win, takaichi’s political stance is certainly bullish for stocks, but weighs on the yen and bonds, given the possible delay in rate hikes,” they emphasize.
For her part, the Senior Research Economist at Aberdeen Investments explains that, as a staunch conservative and protégé of the late Prime Minister Shinzo Abe, markets have started to price in Takaichi’s policies on fiscal stimulus, industrial policy, and a moderate monetary outlook. “But the softening of policy details in the campaign, the constraints of divisions within the Liberal Democratic Party, the minority government, and the bond market mean we do not expect policy changes from the Takaichi administration on the scale of Abenomics,” she concludes.
