Japan’s Ruling Coalition Crumbles, But the Takaichi Trade Isn’t Off the Table, Analysts Say

TradingKey - The breakup of Japan’s long-standing ruling coalition between the Liberal Democratic Party (LDP) and Komeito, after 26 years, has thrown a wrench into Sanae Takaichi’s path to becoming Japan’s next prime minister. The presumptive first female premier champions fiscal expansion and monetary easing — fueling what markets have dubbed the Takaichi trade. But the current political turmoil may threaten that narrative.

On October 10, Komeito announced its withdrawal from the coalition, citing dissatisfaction with the LDP’s handling of a two-year political funding scandal that has plagued the alliance.

This dissolution is now casting doubt on Takaichi’s chances of securing the premiership. Although the LDP holds the most seats in Japan’s 465-member House of Representatives — 196 — even combined with Komeito’s 24 seats, the bloc falls short of a majority. Without Komeito’s support, opposition parties could potentially unite under Japan’s two-round voting system in both houses of parliament, blocking Takaichi’s appointment.

The “Takaichi Trade” Under Pressure

Takaichi’s rise was already being priced into financial markets through what analysts call the Takaichi trade:

• Stock market gains, especially in real estate and construction
• Weaker yen, as investors bet on looser monetary policy
• Higher long-term yields, reflecting expectations of increased government borrowing

Following the coalition’s collapse, the yen strengthened slightly, signaling a partial unwind of this trade.

Shoki Omori, strategist at Mizuho Securities, said that if Takaichi fails to become PM, and another candidate emerges who favors fiscal tightening and supports BOJ rate hikes, the unwinding of the Takaichi trade could accelerate.

While opposition parties remain ideologically divided, Omori expects markets to price in reversal risks, pushing the yen stronger — though not above 140 against the dollar in the near term.

But the Takaichi Trade May Not Be Over

Japanese capital market participants are not fully convinced the trade is dead.

Nomura Securities noted that the LDP now faces two options:

1. Retain a solo cabinet
2. Form a coalition with the DPP

Nomura argues the Takaichi trade could resurface, because the DPP also supports fiscal stimulus — aligning with Takaichi’s core economic agenda.

TD Securities analyzed market reactions to gauge investor sentiment. Their strategists observed that the yen did not sharply rally, suggesting investors believe Takaichi could still push through her reflationary policies with support from smaller opposition parties.

After Takaichi won the LDP leadership race, Japanese equities surged. On Friday, despite the political shock, the Nikkei 225 fell only 1% — indicating underlying confidence that Japan’s first female prime minister may still take office.