Record Stocks, Weaker Yen: What's Next for Japan's Sanae Takaichi

Japanese stocks are pushing farther into record territory on Tuesday, with the country electing stimulus-friendly Sanae Takaichi as prime minister. Her appointment is likely to result in greater government stimulus, stronger equities and a weaker currency.

After surging more than 3.0% on Monday, the blue-chip Nikkei 225 inched ahead 0.3% on Tuesday, with the broad-market Topix essentially flat, technically 0.03% in positive territory. Still, those small increments do result in new all-time closing highs.

Investors have cheered the appointment of Takaichi, a social conservative who served as a minister during the tenure of the late, great Shinzo Abe. Takaichi has pledged to dust off the playbook of “Abenomics” reforms pushed under Japan’s longest-serving prime minister. She favors low interest rates and expansionary fiscal policy.

Didn’t She Already Win?

Takaichi claimed the presidency of the ruling Liberal Democratic Party (LDP) on October 4, something of a surprise win, as I noted at the time. That would ordinarily have made her installation as prime minister a formality. But the LDP’s coalition partner, Komeito, took the moment to dissolve their 26-year alliance, citing a party-funding scandal.

That left the LDP, which has lost its outright majority in both of Japan’s houses of parliament, looking for fresh support to secure the necessary votes to push through Takaichi’s leadership claim. It on Monday cemented an agreement with the Japan Innovation Party (JIP), or Nippon Ishin no Kai, which shares certain nationalist and right-wing policies with Takaichi.

Even though the new coalition is still a couple of votes short of a majority, Takaichi on Tuesday secured the votes she needed in both the upper and lower houses. She drew support from a handful of independents, but more than anything, the opposition is unable to unite behind a candidate. Takaichi replaces Shigeru Ishiba, who officially resigned on Tuesday. Ishiba, who lasted only a year in the post, said last month he would step down, accepting blame for a disastrous showing in upper house elections in July.

Takaichi, 64, was then sworn in by Emperor Naruhito at the Imperial Palace on Tuesday night, becoming the first woman to lead Japan. Although she promises “Nordic” levels of female representation in her cabinet, her initial roster of 19 ministers includes only two other women. Satsuki Katayama becomes Japan’s first female finance minister, while Kimi Onoda takes the role of economic security minister.

Keep Your Rivals Close

Other noteworthy appointments include the selection of Ryosei Akazawa, the man who led Japan’s trade negotiations with Washington, as trade minister. She appointed Shinjiro Koizumi as defense minister and Toshimitsu Motegi as foreign minister, giving plum positions to her two main rivals in the internal LDP vote.

Takaichi will immediately be busy, with Japan set to be a “dialogue partner” at the ASEAN Summit of Southeast Asian nations due to start on Sunday in Malaysia. Next, U.S. President Donald Trump has scheduled to arrive in Japan on Monday for three days. Both Takaichi and Trump will then proceed to the APEC Summit in South Korea from October 31 to November 1.

Trump got on well with Abe, so sadly assassinated in 2022, and cheered Takaichi’s leadership win. She will no doubt seek to rebuild Japan’s U.S. alliance, sorely tested by dramatically increased U.S. tariffs.

The trade deal struck under Ishiba set the U.S. import tax on Japanese goods at 15%, including for automobiles. But it left unclear the details of a $550 billion investment pledge by Japan, money Japan says will come mainly in the form of loan guarantees rather than direct investment into the United States.

Tightrope to Walk at Home

On the home front, the new prime minister faces resentment over rising prices. Meanwhile, the ultranationalist Sanseito party has gained in popularity with its anti-foreigner “Japan first” policies, increasing its Upper House representation from one seat to 14 in July’s vote.

These tensions will make for a fraught political balancing act if Takaichi is going to get anything done. Her coalition must continue to seek support from politicians in smaller parties to push through any of her policies.

Takaichi must contend with inflation currently running at 2.7% as of August. That’s down from 4.0% in January, but means price increases have been above the central Bank of Japan’s target 2.0% rate since March 2022. As I noted when I was in Japan in July, consumers are distressed about price hikes in key goods such as rice. At its peak in May, a 5 kilogram bag of rice touched ¥4,280 ($28), double the price of a year ago.

Shift to the Right, but How Far?

Takaichi drew support from the LDP’s conservative wing, so her partnership with the JIP shifts the alliance’s allegiances to the right, after the exit of moderate Komeito, which is backed by a Buddhist group. The JIP and Takaichi both favor revising Japan’s postwar constitution to allow the country explicitly to have a military rather than what are now called “Self-Defense Forces.”

But Takaichi is already moderating her behavior. She avoided a visit to the controversial Yasukuni Shrine during its three-day autumn festival, which finished on Sunday, sending a gift instead. Such trips anger Asian neighbors such as China and South Korea since the shrine lists the names of 2.5 million of Japan’s war dead, including the names of 14 men charged with Class A war crimes during World War II. Takaichi has visited the shrine in the past, including as a minister, but the last visit by a sitting Japanese leader was in 2013 — when Abe came calling in person.

Takaichi says she will seek “candid discussions” with Trump when he comes calling. She cites the formidable British leader Margaret Thatcher as an inspiration, but steps into a PM seat warmed by three Abe successors who achieved little. How to handle China’s superpower status and India’s economic ascent, which sees it making a run to eclipse Japan in total economic output, will also present a fraught challenge. 

“Japan now faces grave internal and external challenges, and we have no time to stand still,” she said at her first press conference as prime minister.

Where Does the Yen Go?

Since Takaichi favors heavier government spending, the yen has weakened as she takes office. It is down 1.6% on Tuesday, sitting at ¥152 to the U.S. dollar, softening 3.3% from ¥147 before her internal party win.

In some of her first remarks as leader, she pledged to tackle inflation and to draft an “economic package” to deal with rising prices.

Her choice for finance minister is interesting. Katayama, 66, is a veteran politician and former finance ministry bureaucrat. In March, she told Reuters that Japan’s economic fundamentals indicate the yen should be trading closer to ¥120 to ¥130 to the U.S. dollar. But at that point, the Japanese currency was strengthening, having gone north of ¥161 in July 2024.

So Katayama may favor a stronger yen in the long run. Part of the recent inflation spike stems from higher costs for imported goods, fuel and raw materials. Like her boss, though, she is in no hurry to immediately rock the boat. Upon her appointment, she told reporters only that it is desirable for foreign-exchange rates to move stably, reflecting fundamentals — standard politico-speak. Katayama, whose ministry in charge of official communication with the central bank, declined to comment on the BOJ or its interest-rate policy.

Takaichi Trade to Continue

Regardless of the new administration’s policy on the yen, the Takaichi trade remains very much in play. Both Katayama and Takaichi favor using government stimulus as a way of revitalizing Japan’s economy, moves that are positive for stocks.

The Nikkei, capturing the performance of “Japan Inc.” and the country’s major multinationals, on Tuesday came very close to crossing the 50,000 mark for the first time. It touched 49,946 before settling back slightly in afternoon trade, to end at 49,316.

The Topix has performed better this year during times of trade tension, since it captures the vast majority of the Japanese stock market, giving it a greater domestic bent. But the Nikkei is poised to benefit both from any increase in government spending as well as any weakening of the Japanese yen. It tracks 225 major industrials, many of them multinationals that derive at least a portion of their profits overseas. Such profits are magnified when repatriated into a weakening currency.

The Nikkei has been the big gainer since Takaichi became the likeliest next leader. It is up 3.7% since Friday’s close, and 10.7% since the start of this month, just ahead of her internal party on October 4. Year to date, the Nikkei has advanced 25.5%, outdoing the 19.1% gain for the Nasdaq Composite. The Topix, meanwhile, is up 17.9%, better than the 14.9% climb for the S&P 500.

Japanese equities were some of the best performers in the world after Abe took office in December 2012, for his second stint in power. We may see another sustained run under “Sanaecomics,” as the new leader looks to keep credit cheap, spur wage growth and provide stimulatory tax incentives for issues such as corporate support for child care and family spending.

At the time of publication, McMillan had no positions in any securities mentioned.