With Sanae Takaichi's Liberal Democratic Party securing a "supermajority" of more than two-thirds seats in the House of Representatives election, Japanese politics has witnessed a historic turning point. This victory not only consolidated Takaichi's ruling position but also foreshadowed Japan's shift towards an economic path dominated by expansionary fiscal policy. Markets anticipate that the yen and bond market will remain under pressure due to the "Takaichi trade," while the stock market will benefit from policy dividends and be bullish.
Expansionary fiscal expectations and the yen's performance
Sanae Takaichi secured a supermajority of seats, removing a political obstacle to a large-scale fiscal stimulus plan. The market widely expects the Takaichi city government to finance public spending through borrowing. Such expansionary policies not only exacerbate Japan's already heavy debt burden but also put pressure on the yen. Following the election results, the yen weakened against the dollar to the 157.50 range. While a weaker yen benefits export-oriented companies, investors are closely watching whether the Japanese authorities will intervene in the currency market to address capital outflows and inflationary pressures.
High-market trading and stock market risk sentiment
Benefiting from policy continuity and expectations of stimulus packages, Japanese and Asia-Pacific stock markets exhibited strong risk-on sentiment. The so-called "high-market trading" reflects investors' positive interpretation of the low-interest-rate environment and fiscal support. Coupled with the strong rebound in US stocks last Friday, market funds are shifting from technology stocks to cyclical defensive stocks and heavyweight stocks. Although macroeconomic uncertainties remain, the ruling party's absolute majority provides short-term political certainty, helping to support asset valuations.
Bond market pressures and concerns about debt burden
Under Kaohsiung's governing framework, the bond market faces significant pressure. Increased government spending is expected to boost the supply of government bonds, potentially pushing up yields on Japanese government bonds (JGBs). Investors are concerned that the sustainability of Japan's long-term debt will be questioned without a clear debt management plan. This also limits the Bank of Japan's (BOJ) room to tighten monetary policy, making it difficult for the yield spread between Japanese and US Treasuries to narrow significantly in the short term.
The interconnected effects of the global macroeconomic background
Aside from domestic factors in Japan, global markets remain heavily influenced by US economic data. This week's upcoming US non-farm payrolls and inflation figures will determine the Federal Reserve's (Fed) interest rate path. Currently, the market considers the probability of a rate cut next month to be less than 20%, meaning the dollar's strength may continue. Amidst the interplay of global liquidity tightening and Japanese fiscal expansion, commodity prices such as gold have risen due to safe-haven demand, while energy prices have fallen due to easing geopolitical tensions, resulting in highly volatile markets.
This article, "Kaohsiung's Early Seedlings Achieve a Major Victory: How Will Kaohsiung's Trading Impact Future Financial Trends?", first appeared on ABMedia ABMedia .
