By Rocky Swift
TOKYO, Feb 8 (Reuters) – Japan’s volatile financial markets must now face Prime Minister Sanae Takaichi firmly in the driver’s seat after her decisive victory on Sunday, giving her an electoral mandate to turn around the economy.
The question for investors is whether Takaichi’s electoral momentum will prompt her to expand her stimulus ambitions or whether it will give her the political freedom to proceed more cautiously.
Since her rise to become the nation’s first female premier began in October, the “Takaichi trade” has pushed domestic shares to record highs while causing a precipitous selloff in Japanese government bonds and the yen.
Voters braved heavy snow in Tokyo and other parts of Japan to deliver what exit polls indicated was the most decisive victory for Takaichi’s Liberal Democratic Party since 1996.
“The stock market really believes in Takaichi, so the big win will be good news for equities when markets open on Monday,” said Chris Scicluna, head of research at Daiwa Capital Markets Europe.
Takaichi, a devotee of late Prime Minister Shinzo Abe’s “Abenomics” stimulus policies, promised a proactive fiscal policy financed mostly through bond issuance.
She came into office at a low point in power and popularity for her Liberal Democratic Party, which ruled Japan for much of the post-World War II period, forcing her to negotiate with opposition parties with even more liberal fiscal platforms.
“The foundation of the administration will become much more stable, making it easier for expectations to build around economic policy advancement,” said Kota Suzuki, strategist at Nomura Asset Management. “Because there will no longer be a need to actively seek the cooperation of the opposition, there will be less pressure for giveaway-style fiscal expansion.”
With polls already pointing to a decisive LDP victory, Japan’s benchmark Nikkei 225 Index hit an all-time high of 54,782.83 on Tuesday. Recent big winners include sectors such as defence, artificial intelligence and chips which have been selected by Takaichi for targeted investment.
But the prospect of more government issuance has left unsettled investors already worried about Japan’s debt burden, the largest in the developed world. That trouble came on January 20, when rates across the JGB yield curve shot to multi-decade or even record levels after Takaichi called for a snap election and embraced the suspension of the sales tax on food.
The yen has also been punished, losing about 6% against the dollar since Takaichi’s election as prime minister in October and hitting record lows against the euro and Swiss franc. Only threats of joint intervention of the currency market with the United States arrested the slide of the yen.