Sanae Takaichi won the Liberal Democratic Party (LDP) presidential election on Saturday, October 4, defeating Shinjiro Koizumi in the runoff election. As the outcome of the election is directly tied to Japan’s policy and economic direction, investors paid close attention, and the outcome was met with a broadly positive response when markets reopened. Equities were sharply higher on expectations for expansionary fiscal policy, a weaker Japanese yen (JPY), and fading expectations for a tightening in monetary policy by the Bank of Japan (BoJ). The yield curve on the Japanese government bonds (JGBs) steepened, with short-end rates retreating accordingly and longer-end yields rising.

Takaichi campaigned on a platform of proactive expansionary fiscal policy and a bias toward dovish monetary policy, the combination of which is supportive of risk assets. However, the scale and specifics of her fiscal spending will only be determined after the cabinet is formed.

Takaichi elected as the LDP president

The ruling coalition of the LDP and Komeito does not hold a majority in either the Lower or Upper House, and opposition parties appear unwilling to field a unified candidate. As a result, Takaichi is expected to be appointed as Japan’s first female prime minister in an extraordinary Diet session in the coming days.

Prior to the LDP presidential election, there were three potential candidates: Koizumi, Takaichi, and Hayashi, with Koizumi widely seen as the frontrunner. As such, the market had largely priced in a Koizumi victory, making Takaichi’s win a surprise for investors.

The unexpected result was driven by surprise votes from the camps of Kobayashi and Motegi, the other two alternative candidates in the first-round vote—who were supported by the Aso faction—shifting to Takaichi. Takaichi also secured more votes from the most rank-and-file party members in the first round, which led some Diet members to switch their support to her in the runoff.

Implications for fiscal and monetary policies

Compared to Prime Minister Ishiba and other candidates in the leadership race, Takaichi is politically conservative and has advocated for expansionary fiscal policies, with a focus on supporting consumption and defense spending.

In the press conference following Takaichi’s victory, she announced plans for the early cancellation of gasoline and diesel taxes, as well as support for wage increases at loss-making small and medium-sized companies. Takaichi has previously mentioned introducing refundable tax credits. Details on the scale and specifics of expansionary fiscal plans are expected in the coming months and are likely to be affected by developments in the coalition, whether through the existing relationship with the Komeito party or potential expansion with other political parties.

Takaichi has also taken a dovish stance on the BoJ’s monetary policy. She has previously emphasized that although the BoJ should determine the specific tools of monetary policy, the government bears ultimate responsibility for setting the direction of economic and monetary policies, indicating her intention to maintain close dialogue with the BoJ.

Investment implications

Looking ahead, concerns over fiscal deterioration and rising inflation are expected to put upward pressure on long-dated government bond  yields and contribute to JPY depreciation. Conversely, short-term rates are likely to face downward pressure as expectations for further tightening of monetary policy by the BoJ recede.

While there is a risk that concerns over rising bond yields and fiscal deterioration could lead to a loss of investor confidence in Japanese assets, including equities, the prevailing view is that expectations for expansionary fiscal policy and a weaker JPY are likely to drive Japanese equities higher. As sustainable wage increases support domestic consumption and a weaker currency provides a tailwind for external demand for Japanese exporters, this adds to our existing positive outlook on Japanese equities. However, it may take time before the new administration’s direction becomes clear, and policy negotiations with opposition parties remain uncertain. As a result, the market may adopt a wait-and-see stance once the initial reaction subsides.

For investors, key developments will be the formation of the new cabinet, along with subsequent deliberations on the FY2025 supplementary budget and the FY2026 budget. Furthermore, Takaichi may look to expand the current coalition; however, there is little detail on the potential mix of parties or the timeline. 

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