Japan’s stocks, bonds, and currency face a “triple consecutive sell-off”: The “Kishida trade” is over, and the “Sell Japan” trade has only just begun.

Japan’s stocks, bonds, and currency face a “triple consecutive sell-off”: The “Kishida trade” is over, and the “Sell Japan” trade has only just begun.

Japanese Prime Minister Sanae Takaichi is facing her first major market test since taking office—the upcoming fiscal stimulus plan threatens to upend the market rally sparked by her election.

As markets expect the Japanese government to announce the long-awaited economic stimulus package on Friday, Japanese government bonds have plunged this week, the yen fell into a danger zone that could trigger intervention, and on Tuesday, the Nikkei 225 Index recorded its biggest drop since April.

(USD/JPY exchange rate returns to 157 for the first time in 10 months)

Back in October, the market bet that Prime Minister Sanae Takaichi's fiscal expansion would revitalize Japan’s economic growth and push Japanese stocks to record highs. But by November 19—less than a month after Takaichi’s inauguration—the Nikkei 225 has wiped out all gains since her election, hitting investors hard.

Although Japanese stocks are likely to rebound on Thursday, aided by Nvidia’s earnings report, diplomatic frictions continue to present risks. Some analysts believe the “Sell Japan” trade may have just begun.

Scale of the Stimulus Plan Raises “Triple Sell-Off” Concerns

The upcoming fiscal stimulus package will be a key test.

Prime Minister Sanae Takaichi’s plan is expected to surpass the 13.9 trillion yen package introduced by her predecessor, with some lawmakers pushing for an additional budget of around 25 trillion yen. Namioka Hiroshi, chief strategist and fund manager at T&D Asset Management, said:

“A scale of 25 trillion yen is very large, and people question whether it is truly necessary.”

He is concerned the plan’s announcement could trigger a “triple sell-off”—stocks, bonds, and the yen all falling at once, similar to the market turmoil in the UK during Liz Truss’s tenure in 2022.

(Japanese 10-year bond yields have accelerated upwards this week)

Alex Loo, macro strategist at TD Securities in Singapore, said:

If Sanae Takaichi opts for a large-scale budget, Japanese long-term bond yields may climb further, and the yen may weaken to 160 yen per US dollar.

The yen’s recent sharp depreciation has been mainly driven by US dollar strength and diminished expectations for a Federal Reserve rate cut; any further drop in the yen could prompt Japanese authorities to intervene. Indicators tracking the pace of currency depreciation have repeatedly approached levels historically associated with intervention over the past month.

A weak yen typically supports Japanese stocks, particularly exporters, but worries over diplomatic frictions, along with corrections in global tech stocks and cryptocurrency, have left Japan’s benchmark index little room to recover.

Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank, pointed out:

“You get a very unusual combination—despite a weaker yen, the Nikkei is not performing well. Despite rising yields, the yen is also weak.”

Policy Credibility Faces Scrutiny

Market sentiment has worsened not only due to concerns about fiscal spending.

Over the past two weeks, Sanae Takaichi scrapped the government’s annual budget-balancing target, vowed to reduce shareholder focus in Japan’s corporate governance code, and sparked diplomatic disputes. These moves have unsettled investors, putting pressure on stocks and driving up bond yields.

Amir Anvarzadeh, Japan equity strategist at Asymmetric Advisors, said:

“The honeymoon period is over. Traders initially cheered Sanae Takaichi and her pro-stimulus policies, but now many are in trouble.”

Since the end of October, Japan’s blue-chip stock index has fallen about 7%, underperforming Korea’s Kospi and Hong Kong’s Hang Seng Index.

From pressure on stocks, bonds, and currency to questions about policy credibility, Sanae Takaichi’s economic agenda is undergoing a tough reality check. The details of Friday’s stimulus package will determine how far the ‘Sell Japan’ trade goes.

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, said:

If Sanae Takaichi loses policy credibility, investors will start selling all assets. If perceptions of policy missteps in Japan worsen, we’ll certainly increase our short positions on the yield curve.

Despite recent volatility potentially persisting, some investors still believe that Takaichi’s spending plans will support Japanese assets in the long run.

Thomas Mathews, Head of Asia-Pacific Markets at Capital Economics, said government cash injections could heat up the economy, strengthen the case for rate hikes, and bolster the yen. Mathews said:

If she implements fiscal stimulus and the economy overheats, rate hikes will be unavoidable. This could trigger a significant yen rebound next year.

Risk DisclaimerThe market involves risk; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situation, or needs of any user. Users should consider whether views, opinions, or conclusions in this article are suitable for their unique circumstances. Invest accordingly at your own risk.