Japanese Stocks Set to Extend Rally With Takaichi to Become PM

0sp1[]la]g5x94ksngi1f[n1_media_dl_1.png Bloomberg

Article content

(Bloomberg) — Japanese stocks look poised to extend record highs Tuesday as investors wager that a new government to be led by Sanae Takaichi will maintain expansionary fiscal policy. The yen and long-maturity bonds remain vulnerable to concerns over excess spending.

Article content

Nikkei futures pointed to more gains when the market opens at 9 a.m. in Tokyo following the fresh peak reached Monday as Takaichi’s Liberal Democratic Party worked through the details of a coalition deal with the Japan Innovation Party (Ishin). The broader Topix index is within a whisker of reclaiming its record. 

Article content

Article content

Article content

Takaichi touted plans to inject more government spending into strategic industries like defense, tech, cybersecurity and nuclear energy during her campaign in the LDP leadership race. The LDP and Ishin in their agreement said they aim to expand private-public sector investments based on responsible, expansionary fiscal policy and streamline government operations with thorough spending reforms.

Article content

Article content

Yet there are also many unanswered questions of investors, including whether the LDP and Ishin will be able to achieve their aims in a fractured parliament, and whether the alliance between the two will last.

Article content

The coalition is not a “green light for Takaichi to pursue the more extreme policies which investors feared during the LDP leadership election,” said James Athey, a portfolio manager at Marlborough Investment Management Ltd. “Her ability to push a hugely expansionary agenda is severely limited by politics and economics,” so there shouldn’t be a significant second leg of the “Takaichi trade,” he said.

Article content

Japan’s sovereign bond yields have recently hit multi-year highs as markets worry that the government may increase spending beyond its means. The political uncertainty has also damped prospects for an early Bank of Japan rate hike, which has weighed on the yen. It was little changed at 150.74 versus the dollar at 7:55 a.m. in Tokyo after touching the weakest level since February earlier this month.

Article content

Article content

While the yen found some support Monday from BOJ board member Hajime Takata, who said the time was ripe for raising the bank’s policy interest rate, overnight index swaps show only a 25% chance of a rate increase later this month. 

Article content

“I think Takaichi’s economic policy will be more balanced after the Ishin joins the government,” said Masayuki Murata, general manager of balanced portfolio investment at Sumitomo Life Insurance Co. “It will be difficult for her to block a rate hike by the BOJ by ignoring all of the BOJ’s logic.”

Article content

Bloomberg Economics’ Taro Kimura said “Ishin’s participation could restrain fiscal largesse while keeping the door open for investment in strategic fields such as AI.”

Article content

—With assistance from Hidenori Yamanaka.

Article content