"‘High market trading’ makes a comeback! Japanese stocks hit new highs, bonds and currencies suffer a double blow."

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“Takaichi trade” is making a comeback in the Japanese financial market.

According to CCTV News, Japanese Prime Minister Sanae Takaichi has conveyed to Liberal Democratic Party officials her intention to dissolve the House of Representatives on the 23rd and hold a snap general election. Stimulated by this news, the Nikkei 225 Index surged more than 3% on Tuesday, reaching an all-time high. At the same time, Japanese government bonds fell sharply across the board, with the 10-year bond yield climbing to its highest level since February 1999; the 20-year bond yield even reached a record high. In the foreign exchange market, the yen/dollar rate once dropped to 158.91, the lowest since July 2024.

Analysts point out that if Sanae Takaichi receives a stronger mandate in the snap election, it will further solidify her expansionary fiscal stance and preference for loose monetary policy. Although this prospect has boosted the stock market, it has also sparked concerns over the sustainability of Japanese debt, increasing the selling pressure on bonds and the yen.

Election bets drive up risk appetite

Sanae Takaichi’s intention to hold a snap election has become the trigger for this market rally. Investors are betting that Takaichi will use an election victory to advance her $135 billion stimulus plan. In this context, risk assets are in favor, driving the Nikkei 225 Index to break historical highs.

Accompanying the stock market frenzy is the severe turmoil in Japan’s government bond market. According to Bloomberg data, Japanese government bond prices plunged on Tuesday, causing yields to soar across the board. The 30-year bond yield once rose 12 basis points to 3.52%; the 20-year yield rose to a historic high of 3.135%; and the benchmark 10-year bond yield climbed to 2.135%, the highest in 26 years.

Analysts believe the selloff in the bond market reflects investors’ concerns over future fiscal discipline. Japan, as the developed country with the heaviest debt burden, has a debt-to-GDP ratio exceeding 200%.

CLSA Japan strategist Nicholas Smith believes that although inflation is higher than interest rates – meaning net debt is declining – some investors remain uneasy about Takaichi’s aggressive fiscal plans. Lee Hardman, senior currency analyst at Mitsubishi UFJ Financial Group (MUFG), said that fiscal concerns, coupled with the slow pace of Bank of Japan rate hikes, have left the yen vulnerable to further weakening this year.

Yen under pressure and intervention risks reemerge

Under the dual pressure of political turmoil and the US-Japan interest rate gap, the yen has become the worst-performing currency among the G10. On Tuesday, the yen/dollar exchange rate fell 0.5% to 158.91, breaking the low since July 2024. Some market watchers even predict that, due to ongoing capital outflows and negative real interest rates, the yen may fall to 160 or lower against the dollar by the end of 2026.

The sharp depreciation of the yen has triggered high alert among Japanese authorities. On Monday, Japanese Finance Minister Satsuki Katayama expressed concerns about the one-sided weakness of the yen in a meeting with U.S. Treasury Secretary Bessent in Washington, telling the media: “I expressed concerns about the yen's unilateral weakening, and Secretary Bessent agreed with these concerns.”

Katayama previously stated that, if needed, she has “discretionary power” to intervene in the market. The last time the Ministry of Finance intervened in the foreign exchange market was July 12, 2024, when the yen/dollar hit 159.45.

Mizuho global chief desk strategist Shoki Omori believes that this meeting between Katayama and Bessent is worthy of attention – the focus is not on the specific exchange rate level, but whether volatility is excessively unilateral and rapid. “I think there is a possibility of intervention.”

Although Nicholas Smith, CLSA Japan strategist, believes that with inflation higher than interest rates, Japan’s net debt is actually declining and the yen should strengthen as U.S. rates fall, he also admits that the yen’s recent performance has been “extremely stubborn.” For now, the market remains highly alert, closely watching whether the Japanese government will step in again to support the yen.

Risk warning and disclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice, nor does it take into account individual users’ special investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Invest at your own risk.

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