Japanese financial markets delivered a powerful response to a major political development: the election of Sanae Takaichi as the new leader of the Liberal Democratic Party. Her victory sets the stage for her to become the country’s first female prime minister—an event that has prompted a significant revaluation of Japan’s fiscal and monetary trajectory.
On the day following her win, the Nikkei 225 index surged by 4.8%, while the broader Topix rose 3.1%, reaching record levels. Simultaneously, the yen weakened by 2% against the US dollar, breaking below the key psychological threshold of ¥150.
Markets have interpreted Takaichi’s rise as a green light for aggressive fiscal stimulus, sustained low interest rates, and increased defence spending. In turn, this is reshaping investor expectations across sectors. Companies in pharmaceuticals, automotive, engineering, and semiconductors all experienced strong gains. Defence-related firms like Mitsubishi Heavy Industries jumped by 11% amid speculation about new military investments and closer US-Japan strategic ties.
Bond markets reflected this shift as well. The yield on 30-year Japanese government bonds rose to 3.28%, up by 0.12 percentage points, suggesting investor concerns over future debt supply. Meanwhile, short-term yields declined slightly, with 2-year bond yields falling by 0.05 percentage points, as expectations of near-term rate hikes faded.
The so-called “Takaichi trade” is now being priced in—a bet on a mix of larger government spending, yen depreciation, and a steeper yield curve. For sectors linked to infrastructure, defence, and economic security, these trends could signal strong long-term growth potential. Analysts highlight the potential for “multi-decade tailwinds” across shipbuilding, nuclear energy, and cybersecurity.
However, financial stocks were among the few losers. Companies like Resona Holdings dropped 1.8%, with traders scaling back their expectations for Bank of Japan interest rate hikes. The new leadership’s perceived dovish monetary stance is complicating prior forecasts.
Despite market enthusiasm, not all analysts are convinced of deep structural changes. Some argue that internal LDP dynamics and US-Japan relations may limit the actual implementation of reflationary policies. The potential for more growth-oriented supplementary budgets and larger bond issuances may stir volatility in long-dated bonds, but others expect relative stability in the broader economic landscape.
Uncertainty in global markets—such as the US government shutdown—adds another layer of complexity. While the probability of a near-term rate hike in Japan has dropped below 50%, investors remain split on whether the new government can deliver transformational policies or simply maintain the status quo with a fiscal tilt.
For now, the market has spoken. Investors are preparing for a Japan that may lean into spending, security, and strategic alignment—an agenda that could have ripple effects far beyond Tokyo.