Takaichi Trade Roars Back as Japan Snap Election Bets Mount

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(Bloomberg) — Japanese stocks climbed to new all-time highs while the yen and government bonds slumped on speculation that Prime Minister Sanae Takaichi may soon call a snap election.

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With the prime minister’s popularity running high, a vote could cement her authority and bring a second wind to the so-called Takaichi trade, which tends to fuel equity gains, bond losses and a weak yen.

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The Nikkei 225 and Topix stock benchmarks both rose to fresh intraday records Tuesday, climbing as much as 3.6% and 2.4%, respectively. Japan’s 30-year government bond yield surged as much as 12 basis points to 3.52%, with yields on other tenors also jumping.

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Meanwhile, the yen slipped to around 158.6 to the dollar as of 11:35 a.m. in Tokyo, within close reach of levels not seen since July 2024. The Japanese currency had made a small and temporary recovery after Finance Minister Satsuki Katayama said that she and US Treasury Secretary Scott Bessent shared concerns about the weakening currency. 

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“As the scenario of the LDP securing a single-party majority becomes more realistic, concerns about further fiscal expansion backed by public support are likely to accelerate selling of JGBs and the yen,” said Rinto Maruyama, an FX and rates strategist at SMBC Nikko Securities Inc. Takaichi’s ruling Liberal Democratic Party is currently in a minority in both parliamentary houses.

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Tuesday’s market reaction mirrors the stock buying and bond selling triggered by Takaichi’s appointment as prime minister in October. Her aggressive fiscal spending policies have helped drive Japanese equities to multiple record-highs, while keeping JGBs and the yen under pressure.

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Expectations that Takaichi could bolster her policy mandate in an election are reigniting that trade Tuesday, said Masahiko Loo, senior fixed-income strategist at State Street Investment Management. “The path of least resistance for now is higher Nikkei, weaker yen and JGBs (steeper yield), on a classic backdrop of the ‘Takaichi trade,’” he said. 

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The yen’s weakness risks triggering intervention by the Ministry of Finance if it breaks beyond 161 to the dollar, Loo added. 

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What Bloomberg Strategists say:

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The big yield dispersion at the long end of the Japanese bond curve shows no sign of reversing, which suggests BOJ intervention may be the only way to shore up the market. Moreover, talk of early Japanese elections will further undermine sentiment in JGBs as boosting stocks will be a priority for the government heading into any vote.

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— Mark Cranfield. Markets Live Strategist. Read more on MLIV.

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Sectors that stand to benefit from Takaichi’s spending, including defense, AI and nuclear power, led stock gains in Tokyo. Kawasaki Heavy Industries Ltd. surged as much as 7.5% while chip-gear makers Lasertec Corp. and Tokyo Electron Ltd. soared over 9%. Nuclear plant engineer Toyo Engineering Corp. jumped 15%. 

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The yen’s weakness was also a boon for Japanese exporters, with Toyota Motor Corp. shares advancing as much as 5.6% and Hitachi Ltd. up 3.8%. 

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“We expect significant gains in so-called Takaichi stocks,” including energy and space-related names, “and highly forex-sensitive stocks” in the near term, wrote Citi Research analysts Ryota Sakagami and Keishi Ueda in a note. 

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However, the Takaichi trade revival could be short-lived as the LDP appears to be split on the idea of an election, warned Sakagami and Ueda. Further yen weakness could also “trigger concern about inflation and economic deterioration,” weighing on stocks down the line, they said. 

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—With assistance from Momoka Yokoyama.

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