Japan’s financial markets entered a euphoria phase on today with the Nikkei 225 peaking. The victory moves investors to embrace the rally as Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) secured a landslide victory in Sunday’s snap election for a powerful “supermajority” to carry out her hawkish economic agenda.
The “Takaichi Trade”: Markets Honor a Supermajority
In early Monday’s early trading, the Nikkei 225 share average skyrocketed 5.7%, reaching a record-breaking level of 57,337.07. The rally was set into motion after confirmation that the LDP won 316 of the 465 seats in the lower house. Together with its coalition partner, the Japan Innovation Party, Takaichi now controls a two-thirds supermajority.
Why the Market is Rallying
Investors are now betting on "Sanaenomics" a policy framework that is based on aggressive fiscal borrowing and a continuation of ultra-loose monetary policies.
- Economic Expansion: Takaichi has committed to a large scale stimulus, centered around AI, nuclear fusion and defense.
- Consumption Tax Relief: Proposed reduction in food consumption tax should stimulate the domestic consumption of consumer spending.
- Policy Stability: The supermajority enables the LDP to override the upper house (they don’t have any majority in that one) and eliminates the ‘gridlock discount’ over the value of Japanese assets.
Sector Winners: AI & Defence Are at the Forefront
There was also a focus on the “risk-on” sentiment seen largest in technology and heavy industry:
- Semiconductors: Chip-testing leader Advantest was up 12 percent, while SoftBank Group rose 7.7 percent.
- Industrials: Strong defense-specific shares, notably Mitsubishi Heavy Industries, jumped double digits after Takaichi pledged to modernize Japan’s military equipment in recent days.
- Energy: Stocks focused on nuclear infrastructure rose on the Prime Minister's pledge to ensure energy security.
The Currency and Bond Reaction
Although equities took off, the Japanese Yen experienced pressure, swinging from about 157 against the US Dollar. The fact that government borrowing could be lifted also propelled 10-year Japanese Government Bond (JGB) yields 4.5 basis points higher at 2.275%, suggesting market concerns on government funding for Takaichi's large budget.
Analyst Conclusion: A Fresh Look at Japan?
“The voters have unambiguously pushed for Sanaenomics,” said Tim Waterer, chief market analyst at KCM Trade. “The landslide win provides a green light for fiscal stimulus to reset Japan’s growth path for a decade.”. Nonetheless, some economists caution that although the "Takaichi Trade" is on today's full tilt, the administration will ultimately need to grapple with Japan’s debt-to-GDP ratio, which remains the highest in the entire developed world, in order to ensure it’s not a question of long-term sustainability.
