By Rocky Swift
TOKYO (Reuters) – Japanese equity markets are anticipated to continue breaking records despite the sluggish performance of the nation’s currency and bonds following the election of fiscal dove Sanae Takaichi as the new leader of the ruling party, a position that likely paves her way to the Prime Minister’s office.
Takaichi, 64, is recognized for having the most aggressive fiscal and monetary policies among the five candidates competing within the Liberal Democratic Party to take over from the more hawkish Prime Minister Shigeru Ishiba.
Prior to the LDP election, investors began engaging in a “Takaichi trade,” which involved going long on stocks while taking bearish positions on Japanese government bonds, particularly those with longer maturities, in anticipation of Takaichi’s victory, a supporter of the late Shinzo Abe’s “Abenomics” policies.
‘POSITIVE SURPRISE’ FOR STOCKS, BONDS IN TURBULENCE
On Friday, Japan’s key Nikkei index achieved a record closing value of 45,769.50, surpassing the previous all-time high set just a week earlier, as investors speculated that Takaichi’s successor would adopt a more dovish approach.
Recent data indicates a buildup of short positions on the index, which might soon be reversed, stated strategist Hiroki Takei from Resona Holdings.
“This could be seen as a favorable surprise for stock valuations,” Takei remarked. “If a short-covering rally occurs, it could further energize the market, potentially driving the index toward 47,000.”
The Japanese bond market has been on shaky ground since late May, facing reduced demand from traditional investors, less backing from the central bank, and rising concerns surrounding escalating national debt.
The situation worsened in July, after Ishiba’s coalition lost its majority in the upper house of parliament, following its previous defeat in the lower house last year, as alternative parties advocating for tax reductions and increased fiscal spending gained ground.
The yield on 30-year JGBs skyrocketed to a record 3.285% on September 8, marking the first trading day post-Ishiba’s resignation announcement.
In the weeks that followed, while the Nikkei’s upward movement decelerated, longer-term JGBs rallied as there was a shift in favor of farm minister Shinjiro Koizumi in the LDP race and Takaichi appeared to soften her positions, notably excluding sales tax reductions from her platform and maintaining a low profile regarding the Bank of Japan’s policies.
“Her recent tempering of rhetoric might suggest a more cautious stance, yet the prevailing sentiment is that she will advocate for more relaxed fiscal and monetary policies,” noted James Athey, a fixed income manager at British investment firm Marlborough. “Consequently, we may witness a negative reaction in long-term JGBs and the yen.”
Japan’s currency concluded trading at 147.44 per dollar on Friday, experiencing a 1.4% increase over the week, marking the most significant gain since mid-May.
