Japanese markets are on edge ahead of a weekend vote that will decide the country’s next prime minister and shape economic and central bank policy. The outcome of the Liberal Democratic Party (LDP) leadership race could shift the balance between fiscal stimulus, tax cuts, and monetary tightening all issues investors are closely watching.
Prime Minister Shigeru Ishiba’s resignation last month triggered the leadership race. Ishiba, a fiscal hawk, had faced backlash after his coalition lost seats to outsider parties pushing tax cuts and more spending. His departure opened the door for three main contenders: party veteran Sanae Takaichi, farm minister Shinjiro Koizumi, and government spokesperson Yoshimasa Hayashi. Each carries different implications for markets.
The candidates and market bets
Sanae Takaichi: Known as a fiscal expansionist, she has previously pushed for tax cuts, stimulus, and keeping monetary policy loose. A victory could steepen the yield curve and weaken the yen, as investors expect higher spending and more debt issuance.
Shinjiro Koizumi: Seen as the frontrunner, he has promised measures to ease household costs but is less likely to interfere with Bank of Japan (BOJ) policy. Markets expect a more stable reaction if he wins.
Yoshimasa Hayashi: The dark horse candidate, he has spoken against large stimulus and supports BOJ rate hikes, a stance that could push bond yields higher if he surprises with a win.
Market reaction so far
The Nikkei has pulled back slightly from record highs but still shows confidence that Koizumi or Hayashi will prevail. Long-term bond yields, which spiked after Ishiba’s resignation, have eased as traders pared back bets on a Takaichi-led stimulus push. Still, the “Takaichi trade” bullish on stocks, bearish on bonds could return if she wins.
Why it matters
For Japan: The vote will signal how the government balances rising household costs with the need for fiscal discipline amid record public debt.
For markets: Stocks, bonds, and the yen could all see sharp moves depending on who wins. Takaichi’s victory would likely spark the biggest volatility.
For policy: The BOJ has already been under pressure as short-term yields climb to 17-year highs. A new prime minister’s stance could either give it room to raise rates or push for looser conditions.
Future Outlook
Traders largely expect Koizumi to win, bringing stability and a muted market response. But if Takaichi prevails, analysts predict a surge in stocks, a steepening yield curve, and yen depreciation. Hayashi’s rise, though less likely, would make the BOJ’s path to rate hikes clearer. Whatever the outcome, Japan’s markets are preparing for a critical shift in leadership at a time of heightened global uncertainty.
With information from Reuters.
AloJapan.com