Japan’s stock market is likely to gain support following the surprise victory of pro-stimulus Sanae Takaichi in the ruling Liberal Democratic Party (LDP) leadership election, while the yen and long-term government bonds could come under pressure.
Investors and strategists, including those at Pepperstone Group Ltd. and Nomura Securities Co., expect the yield curve to steepen as a result.
Takaichi, a strong advocate of easy fiscal and monetary policy, is expected to raise concerns over rising bond issuance, while lowering expectations of a Bank of Japan (BOJ) rate hike later this month. “This was very much a surprise result and not the one that markets had been discounting,” said Michael Brown, senior research strategist at Pepperstone.
He added that Takaichi’s win is “likely to be yen negative, on the dovish BOJ repricing, coupled with a steeper JGB curve given her looser fiscal views, though both of those combined should be a boost for the Nikkei.”
Takaichi is set to become Japan’s first female prime minister later this month in a parliamentary vote. Investors had expected the leadership to go to political scion Shinjiro Koizumi, who was seen as more fiscally cautious and supportive of BOJ rate normalisation.
Bank stocks are likely to struggle amid expectations that rate hikes will be delayed, while domestic demand and small-cap shares could see a “significant tailwind” in the short term, said Richard Kaye, co-head of Japan equity strategy at Comgest Asset Management.
Market participants, including foreign investors, are likely to welcome any signs of a return to Abenomics, the economic policies of the late former prime minister Shinzo Abe.
As a protege of Abe, Takaichi has advocated for cash handouts and tax rebates to help households grappling with inflation, and has openly supported additional bond issuance to finance fiscal stimulus.
Before Takaichi’s win, bond investors had been cautious about fiscal spending, particularly with opposition calls for tax cuts and speculation over BOJ rate hikes.
This caution pushed 10-year yields near their highest levels since 2008 and strengthened the yen against the dollar in the past week. Meanwhile, the Nikkei 225 hit a fresh all-time high, benefiting from a global rally in technology stocks.
According to Mari Iwashita, executive rates strategist at Nomura Securities, Takaichi’s unexpected victory is likely to revive a market trend characterised by a weaker yen, higher stock prices, and a steeper yield curve. With the prospect of an October BOJ rate hike fading, she expects the central bank to hold off on increasing rates in the near term.
However, Rong Ren Goh, fixed income portfolio manager at Eastspring Investments, cautions that any yen weakness resulting from her win may be limited due to narrowing Japan-US interest rate differentials and continued uncertainty over the Federal Reserve’s policy direction.
Takaichi faces challenges in implementing her domestic agenda, as her party no longer holds a majority in either house of parliament. She is also expected to face an early diplomatic test with a reported visit from former US President Donald Trump later this month.
Looking ahead, Richard Kaye expresses optimism about Japan’s stock market, highlighting that a shift in perception towards Japan could drive new approaches in deregulation, monetary policy, and Japan-US trade relations. He suggests this could mark a turning point and present a significant opportunity for the country.
Bloomberg
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