Japanese equities have hit record highs in response to Sanae Takaichi being elected as Liberal Democratic Party president, all but confirming her as Japan’s first female Prime Minister
Takaichi, who is a big advocate of fiscal expansion, is expected to be appointed as prime minister on October 15.
“Given her support for expansive fiscal policy and monetary easing, Takaichi’s victory sparked a rally in Japanese stocks,” said Naomi Fink, chief global strategist at Amova Asset Management. “At the same time, the overnight indexed swap market started to price out expectations for near-term Bank of Japan (BOJ) interest rate hikes.”
Many of Takaichi’s growth policies overlap with those of opposition politicians and it seems markets expect them to come into force, sending shares higher, while the yen weakened against the US dollar.
Among the policies favoured by Takaichi is abolishing provision tax rates on gasoline and light oil, raising the income threshold for tax breaks and implementing tax credits with benefits.
Japanese asset management group Asset Management One notes that while Takaichi’s policies are set to drive economic growth, there are concerns that they would result in a “significant increase” in government bond issuance, putting upwards pressure on long term interest rates.
The investment group also noted that Takaichi has also made comments that it says can be interpreted as cautioning against the Bank of Japan raising interest rates, given the “precarious state” of the Japanese economy.
However, Asset Management One said that as Takaichi has a “weak governing foundation”, it appears that she will prioritise LDP party unity and consolidating her position. This will act as a constraint and prevent excessive government borrowing to fund growth policies.
“It is expected that for the time being, certain restraints will be placed on the promotion of her personal views, including excessive fiscal expansion,” it said.
Fink also noted: “With term premiums already rising, particularly at the long end of the yield curve, investors may push back against any perception of excessive fiscal largesse. In this sense, it is possible that the bond market may act as a check on overly aggressive spending.”
There is also a warning given the bond situation. On this, Fink said: “Long-term Japanese government bonds have come under pressure, providing a warning against one-way expectations of concerted Abenomics-style macroeconomic stimulus.”
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