Japan’s financial markets responded with volatility following the election of Sanae Takaichi as leader of the ruling Liberal Democratic Party (LDP), positioning her to become the country’s first female prime minister. During the day of the announcement, October 6, the Nikkei 225 index surged nearly 5%, hitting record highs, while the yen plunged past ¥150 to the US dollar, a drop of about 1.8% in one session.
Investors appear to be pricing in a revival of expansionary fiscal policy under Takaichi, reminiscent of the “Abenomics” era. Expectations that she will favour generous public spending, tax cuts, and a more dovish stance from the Bank of Japan have spurred a “Takaichi trade”: long equities, short yen. Some analysts, however, warn that the reaction may overshoot fundamentals, given Japan’s elevated inflation (around 3%) and public debt.
In the currency markets, the yen bore the brunt of investor sentiment. The dollar-yen rate breached the symbolic ¥150 threshold, and the swaps market has new expectations for next moves by the Bank of Japan: the probability of a rate hike this month fell to around 25%, down from about 60% before the leadership contest. Major banks, including Deutsche Bank and Goldman Sachs, announced they were closing bullish yen positions, citing renewed uncertainty in monetary policy under Takaichi’s leadership.
Sector-wise, exporters, semiconductor firms, defense contractors and energy technology players led the gains, benefiting from both a weaker yen, for exportation, and expectations of policy support. Mitsubishi Heavy Industries jumped about 11%, and Japan Steel Works, important in nuclear energy supply chains, soared more than 15% the same day of the announcement. In the clean energy space, conventional ESG names slumped over concerns about Takaichi’s criticism of large scale solar energy projects.
That said, market watchers caution that the honeymoon may fade. Takaichi inherits a fragmented party (LDP) and must navigate stiff political constraints. Her expansionist posture could clash with inflation pressures and the Bank of Japan’s cautious remodelling of policy. Moreover, elevated yields, weak currency, and rising borrowing costs could challenge Japan’s already high debt metrics. In short: markets have given Takaichi a strong vote of confidence for now, but the real test will be in execution and external shocks.
