Nikkei Soars, Yen Sinks After Takaichi Picked as Japanese PM

The election of Sanae Takaichi as the new leader of Japan’s ruling LDP party – and its first female prime minister – led to a record stock surge on Monday, while the yen and long-term bonds sank.

Japanese investors have waged bets on Takaichi, who was a fan of Shinzo Abe’s stimulus policies, opting for a big spending and loose monetary policy once the Liberal Democratic Party leader is confirmed as the country’s new PM.

The Nikkei 225 Index soared 4.75% to close at 47,944.76 after rising as high as 48,150.04 – breaking through three psychologically key thousand-point barriers for the first time ever. The broader Topix gauge jumped 3.1%.

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The 30-year Japanese government bond (JGB) plunged, sending the yield to a record high. Meanwhile, the yield on the two-year note slid, reflecting expectations of later rate hikes by the Bank of Japan.

The yen tumbled nearly 2% against the dollar and traded at an all-time low versus the euro.

Takaichi was seen as having the most expansionist fiscal and monetary agenda among five LDP candidates who sought to replace hawkish Prime Minister Shigeru Ishiba.

“The Nikkei was on course to reach as high as 48,000 by year-end, but because Takaichi was chosen as the LDP leader, it shot up toward that level already,” Hitoshi Asaoka, the chief strategist at Asset Management One, said.

“The market welcomes her spending policy, but whether she can achieve that goal is not certain, as the LDP is still a minority party. The Nikkei may retreat once before year-end.”

Motegi likely foreign minister

Takaichi began eyeing cabinet posts on Monday, with media reporting she planned to install former defence minister Minoru Kihara as chief cabinet secretary and bring back ex-foreign minister Toshimitsu Motegi as the country’s top diplomat.

Her pick for finance minister, which will be closely watched by investors, was unclear.

In the lead-up to the LDP race, a “Takaichi trade” emerged – long on stocks and bearish on Japanese government bonds, particularly longer maturities – positioning for a win by the veteran lawmaker, who is a devotee of the “Abenomics” stimulus policies of the late Shinzo Abe.

Yields on two-, five-, and 10-year JGBs had all reached levels not seen since the financial crisis in 2008 in the run-up to the LDP election on bets the BOJ could raise rates as early as this month’s meeting. Long-term JGB yields had fallen, flattening the so-called yield curve.

In a run-off vote on Saturday, Takaichi beat farm minister Shinjiro Koizumi, who was seen as more laissez-faire on monetary policy.

“The market had bet that Koizumi would win, and they were positioned for curve flattening,” said Miki Den, the senior Japan rate strategist at SMBC Nikko Securities. “But because the bet on Koizumi was so strong, it will take time to unwind the flattening positions.”

Push for more deficit spending expected

The yen sank 1.8% to 150.13 yen versus the dollar and weakened to 176.22 against the euro, an all-time low.

The yen swaps market on Monday indicated a 41% likelihood of a rate hike by December, down from 68% on Friday.

As a candidate, Takaichi proposed boosting investment in strategic business sectors, including artificial intelligence, semiconductors, nuclear fusion and defence. Shares in those sectors were among the biggest gainers in Tokyo trading.

Mitsubishi Heavy Industries, a major military contractor, jumped 11%, and Japan Steel Works, a supplier of nuclear energy machinery, soared more than 15%.

Yields on long-term debt face upward pressure on expectations, as Takaichi will push for more deficit spending, adding to concerns about Japan’s creditworthiness.

The yield on the 40-year JGB, the longest tenor, soared 12.5 basis points to 3.505%. The 30-year yield briefly reached 3.29%, an all-time high.

An auction of 30-year JGBs on Tuesday will be closely watched for signs of concerns about Japan’s finances and debt management under Takaichi.

Despite a modest issuance amount, the debt sale “is expected to be weak because investors — wary of higher term-premia after Ms Takaichi’s ascent and possible fiscal stimulus — are reluctant to add long-duration risk,” Shoki Omori, the chief desk strategist at Mizuho Securities, wrote in a note.

After her LDP victory, Takaichi told a press conference that the government and central bank must work closely to ensure Japan’s economy achieves demand-driven inflation backed by rising wages and corporate profits.