The Complex Balance of the Takaichi Trade: Japanese Stocks Rise, Yen Weakens, But Flattening JGB Yield Curve Gains Favor

TradingKey - The successful appointment of Sanae Takaichi as Japan’s first female prime minister is reshaping the country’s economic landscape — shifting from the cautious and stable fiscal policies of “Ishiba Economics” to a more aggressive, stimulus-driven approach reminiscent of “Abenomics 2.0.” This shift has reignited the “Takaichi trade,” fueling a rally in Japanese equities and further weakening the yen. However, the outlook for Japanese government bonds (JGBs) has become more uncertain.

Japanese Stocks Hit Record Highs

Fueled by expectations of expansive fiscal policy and accommodative monetary easing under Takaichi’s leadership, the Nikkei 225 Index surged over 2% on Monday, October 27, breaking through the historic 50,000-point mark for the first time.

In her inaugural policy speech last week, Takaichi announced that the new government would pursue “responsible active fiscal policy” — promoting AI development, expanding local and energy subsidies, and supporting households to alleviate cost-of-living pressures on middle- and low-income groups.

While specific details remain unclear, Takaichi pledged increased spending on defense, technology, cybersecurity, and nuclear energy.

Mitsui Sumitomo strategists said the Nikkei’s rise is supported by market expectations of growth-oriented policies. Although stocks dipped briefly after her appointment, the decline was short-lived, with investors stepping in to buy the dip.

Norihiro Yamaguchi, economist at Oxford Economics, noted that fiscal stimulus packages are often welcomed by markets regardless of their actual economic impact. He added that the strong equity reaction also stems from Takaichi’s focus on strategic investments and market-friendly sectors.

A key catalyst behind the latest market breakout is high public approval for Takaichi’s cabinet. According to a Nikkei poll, her support rate stands at 74%, far exceeding former Prime Minister Ishiba Shigeru’s early-term rating of 51%. Other major newspapers — Yomiuri, Asahi, and Mainichi — reported ratings of 71%, 68%, and 65%, respectively — among the highest ever recorded for a newly formed administration.

Nikkei noted that while the coalition between the LDP and Ishin holds only 231 out of 465 seats in the lower house — falling short of a majority — markets still believe high popularity will help stabilize governance and support risk assets.

Some analysts argue that the symbolic significance of Japan’s first female prime minister, combined with her stated commitment to tackling inflation and easing household burdens, aligns closely with public sentiment. This optimism stands out after a three-month period of political stagnation following the July upper house election defeat.

Political Stability and Fiscal Ambition Challenge JGB Outlook

The fragility of Takaichi’s coalition raises questions about policy continuity. With 231 seats, her ruling bloc still falls two seats short of a majority — meaning her premiership is just the beginning, not a guarantee of stability.

Additional risks include:

• The historical pattern of “high start, rapid decline” in cabinet approval ratings
• A fragile “extra-cabinet cooperation” agreement with Ishin
• Internal LDP resistance to Takaichi’s strongly conservative, right-wing stance

Charu Chanana, strategist at Saxo Markets, said that there’s still a lot of uncertainty. Given the complexity of coalition politics, it’s hard to predict how fiscal policy or BOJ normalization will unfold.

While future fiscal spending on defense and tech is driving equity gains, and Takaichi’s clear opposition to BOJ rate hikes continues to weigh on the yen, the JGB yield curve is defying earlier “Takaichi trade” expectations.

Instead of a steep sell-off in long-dated bonds, the market is now favoring a “flattening JGB yield curve trade” — where the spread between short- and long-term yields narrows.

Despite promises of tax cuts and active fiscal policy, the government has not clarified how it will fund these measures — introducing contradictions into its economic agenda.

Analysts note that the initial policy package appears less aggressive than expected, helping keep long-term bond yields relatively stable.

Ayako Sera, strategist at Sumitomo Mitsui, said that given the weak foundation of Takaichi’s government, large-scale fiscal expansion is unlikely to launch quickly.

Sera added that long-term JGBs appear undervalued, and rising demand from life insurers could push the yield curve toward flattening.

On the short end, although BOJ rate hikes may be delayed due to political pressure, persistently above-target inflation and resilient economic fundamentals suggest the central bank could continue gradual tightening.

Vanguard revealed it is positioning for yield curve flattening — increasing exposure to 2-year interest rate swaps, shorting 5-year JGBs, and buying ultra-long 25-year bonds.

Chanana of Saxo added:

“If the new coalition leans into stimulus and the BOJ stays gradual, stocks can keep an upper hand with a weaker yen as tailwind.”

But she warned:

“Any coalition friction or a quicker BOJ normalization would flip the script and likely bring a stronger yen, or even a pause in the Nikkei’s momentum and more JGB volatility.”