Yen Reaction to Takaichi Election: Economic Stimulus Expectations
Following the emergence of Sanae Takaichi, a supporter of economic stimulus policies, as a potential candidate for Prime Minister of Japan, the Yen experienced a significant dip at the start of Monday's trading. The USD/JPY exchange rate reached a high of 149.44.
Analysis of Market Reactions
The foreign exchange market's reaction aligned with strategist expectations. As a proponent of fiscal and monetary easing, Takaichi is seen as likely to trigger concerns about increased bond supply while reducing expectations of a Bank of Japan (BOJ) rate hike this month. Therefore, strategists anticipated that the Japanese stock market and long-term government bond yields might rise at the opening on Monday, while the Yen would weaken.
Potential Sectoral Impacts
Richard Kaye, co-manager of Japanese equity strategy at Comgest Asset Management, indicated that domestically-oriented stocks and small-cap companies may receive a boost driven by growth expectations, while bank stocks, which previously rose on rate hike expectations, might face difficulties. We could also see a shift in focus towards sectors like technology and renewable energy if Takaichi supports these areas with clear policies.
VanEck's Perspective
Anna Wu, cross-asset investment strategist at VanEck Australia, believes this could be a positive surprise for the stock market. Considering her overall fiscal policy, Wu wouldn't be surprised if Japanese long-term government bond yields rose slightly on Monday. She also pointed out that Takaichi is unlikely to overstimulate the economy, which could limit market volatility.
Election Background
After winning the Liberal Democratic Party (LDP) leadership election last Saturday, Takaichi is expected to become the first female Prime Minister of Japan. Investors had previously anticipated that Shinjiro Koizumi, from a prominent political family, would assume this position, who was seen as more cautious on fiscal matters and would have allowed the BOJ to proceed with monetary policy normalization.
Investor Stance on Fiscal Spending
Even before Takaichi's victory, bond investors were cautious about fiscal spending, and opposition parties had been calling for tax cuts.
Bond Yield and Stock Fluctuation
Coupled with speculation about a BOJ rate hike, the Japanese 10-year government bond yield has remained near its highest levels since 2008. This contributed to the Yen's strengthening against the US dollar last week, while the Nikkei 225 index hit a new record high driven by the rise of global technology stocks.
Market Concerns and Hopes
Pelham Smithers, Managing Director of Pelham Smithers Associates, a UK-based Japanese equity research firm, explained that the bond market hopes that Takaichi's pro-growth strategy will not expand the public sector deficit, otherwise it could further trigger a Yen sell-off. However, Yen bulls may point out that the BOJ is more likely to offset increased fiscal stimulus through a more aggressive monetary tightening policy.
Takaichi's Stance on Monetary Policy
Last year, during her campaign for the LDP leadership, Takaichi called raising interest rates "foolish," but her tone has softened this time. However, in a recent survey by Kyodo News, she stated that she believes the BOJ should currently keep interest rates unchanged.
Future Market Expectations
Prior to the vote last Saturday, speculation was mounting about the possibility of the BOJ raising interest rates at its next monetary policy meeting on October 30. With her victory, this trend may reverse. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management Co., believes that the market sees that fiscal discipline will be relaxed, and that she will not show much understanding of the BOJ's rate hike moves. Japanese government bond yields may fall on Monday, especially yields on 2-year and 5-year bonds, while ultra-long-term yields will rise. The pricing of expectations for an October rate hike may decline.
Potential Strategic Investments
Given Takaichi's interest in strategic investments in areas such as artificial intelligence, technology, and industry, stocks in these sectors may benefit. And if Takaichi can successfully renegotiate the terms of the US-Japan trade agreement, and obtain clearer policies or concessions for the sector, the automotive industry may see a rebound.
Potential Diplomatic Challenges
Takaichi is expected to be elected Prime Minister in a parliamentary vote this month. If this happens, she may soon face her first diplomatic test amid reports that US President Trump will visit Japan.
Focus on Coalition Government
Currently, attention is turning to the formation of the next government and how the LDP will cooperate with opposition parties.
Takaichi has expressed her willingness to include other parties in the ruling coalition if necessary. After losing a majority of seats in both the House of Councillors and the House of Representatives in the recent elections, the LDP and its ruling coalition partner, Komeito, no longer have the majority needed to pass the budget and other key legislation in the more powerful House of Representatives.
Long-Term Market Outlook
Marito Ueda, General Manager of SBI FXTrade Co., believes that the market has largely absorbed the expectation that regardless of who becomes Prime Minister, fiscal policy will tend towards expansion as long as there is cooperation with opposition parties. Although there may be an initial impact, this impact is unlikely to last long.
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