Takaichi Trade Drives Japanese Stocks to Record High Amid Stimulus Hopes

Japanese equities surged to unprecedented levels as investors bet on a policy shift heralded by Sanae Takaichi’s victory in the Liberal Democratic Party’s leadership contest, positioning her to become Japan’s first female prime minister. The Nikkei 225 index soared 4.75 per cent on Monday, while the broader Topix index climbed 3.1 per cent, with drug manufacturers, automotive giants and defence companies leading the rally.

Takaichi, recognised as a steadfast advocate of the late Shinzo Abe’s “Abenomics”, is expected to prioritise fiscal stimulus and maintain accommodative monetary conditions. Her impending ascension triggered what market analysts are calling the “Takaichi trade”. The prospect of robust government spending and continued low interest rates has fuelled share price gains, yet simultaneously exerted downward pressure on the yen, which slipped 1.8 per cent against the dollar to breach the psychologically significant 150 yen mark.

Yields on long-dated Japanese government bonds spiked, with the 30-year debt rising by 0.14 percentage points to 3.3 per cent, reflecting investor concerns over potential increases in state borrowing. In contrast, short-term sovereign yields fell, echoing market sentiment that Takaichi favours persistent low rates.

Bank of Japan policy, though independently set, will likely be scrutinised for its alignment with the new government’s economic approach. Takaichi has indicated that harmony between central bank objectives and government fiscal plans is crucial, particularly as Japan battles entrenched labour shortages and recently elevated inflation rates, which peaked at around 4 per cent after decades of stagnation.

The country’s gross government debt looms large, exceeding twice the size of the entire economy, although the net debt-to-GDP ratio is considerably lower. As Takaichi prepares to unveil her stimulus strategy, debates over the sustainability of aggressive fiscal expansion remain front of mind for global investors coping with an already weakened yen.

Analysts at major investment banks have underscored the significance of this policy pivot, warning that the market’s current exuberance could be tempered if concerns grow over the long-term viability of increased spending amidst Japan’s structural economic challenges.