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Japanese stocks surged to record highs and the yen weakened sharply against the dollar as investors placed bets on a “Takaichi trade” of more fiscal stimulus from the country’s expected next prime minister.
The benchmark Nikkei 225 index rose 4.8 per cent on Monday in Tokyo as traders reacted to Sanae Takaichi’s election as leader of the ruling Liberal Democratic party. The broader Topix share index gained 3.1 per cent to hit a new record.
The yen weakened 1.7 per cent against the dollar, breaking past the closely watched level of ¥150.
Takaichi’s ascent as LDP leader puts her on track to become Japan’s first female prime minister in a vote in parliament later this month. Traders in equity, bond and currency markets anticipate that her administration will expand fiscal spending and maintain pressure on the Bank of Japan to keep interest rates low.
“The Takaichi trade is a bet that Japan is heading for big fiscal stimulus, looser monetary bias, a weaker yen and a steeper yield curve, and we are seeing the market playing that pretty hard this morning,” said a Tokyo-based broker.
Pharmaceuticals, carmaking, engineering and semiconductor shares jumped at the market open. Defence companies also rose sharply due to expectations of increased military spending under a Takaichi government. Mitsubishi Heavy Industries gained more than 11 per cent.
Bruce Kirk, a Goldman Sachs Japan equity strategist, said Takaichi was likely to be in even closer strategic alignment with the US on defence and economic security, which would probably “create multi-decade tailwinds” for sectors such as defence, shipbuilding, nuclear power and cyber security.
However financial stocks suffered as traders pulled back on bets that the BoJ would raise interest rates this month. Banking group Resona was down 1.8 per cent.
Going into the weekend, polling had suggested the more fiscally cautious Shinjiro Koizumi would win the LDP leadership race.
Masamichi Adachi, an analyst at UBS, said the probability of a rate increase this month was now “less than 50 per cent” due to “two uncertainties: the US economy with the government shutdown and the new head of the government who has a dovish monetary policy stance”.
The yield on short-term Japanese government bonds fell by five basis points and long-dated Japanese government bonds sold off, with yields on 30-year bonds rising 0.13 percentage points to 3.28 per cent.
Although investors have highlighted the risk that a Takaichi government would significantly expand fiscal stimulus and raise debt, some analysts expect actual policy changes will be limited and not lead to spikes in long-dated bond yields.
“We don’t see a major disruption in the Japanese market because of Takaichi’s victory,” said Kiyong Seong, lead Asia macro strategist at Société Générale.
However, Shoki Omori, Mizuho’s chief strategist, wrote that investors were becoming concerned about an expected greater supply of long-dated bonds due to more defence and “growth-oriented spending, together with the possibility of a larger supplementary budget”.
Takaichi “has advocated for [a] reflation policy for a long time”, so some in the market think her victory could be negative for the yen, Osamu Takashima at Citi wrote in a note.
“However, considering the political power balance in the LDP and Japan’s relationship with the US, we think it will be difficult for the next PM to implement the reflationary policies [she] has proposed,” he added.
