Morgan Stanley on "Sanae Takaichi Trades": Policy stance has shifted to moderately conservative, no MMT for fiscal policy, rate hike expectations may cool down.

Morgan Stanley on "Sanae Takaichi Trades": Policy stance has shifted to moderately conservative, no MMT for fiscal policy, rate hike expectations may cool down.

Kaori Takamichi has won the LDP presidential election and is likely to become Japan's first female prime minister. Morgan Stanley analysts believe that investors' concerns about the new government potentially pursuing extreme fiscal expansion or pressuring the Bank of Japan have been exaggerated, and Kaori Takamichi's policy stance has shifted to a moderate conservative direction.

According to Chase Trading Desk, Morgan Stanley's chief Japan economist Takeshi Yamaguchi analyzed in a report on the 5th that Kaori Takamichi avoided reiterating her past statements on cutting the consumption tax or opposing a Bank of Japan rate hike during her campaign, which shows a more cautious attitude in policy. This shift may help her gain the support of more LDP Diet members in the runoff.

In her campaign promises, Kaori Takamichi advocates a "responsible expansionary fiscal policy," but Morgan Stanley emphasizes that some overseas investors mistakenly assume she supports an extreme fiscal expansion similar to Modern Monetary Theory (MMT), yet she has never made such statements. Analysts question whether a politician who loves reading Margaret Thatcher's memoirs would truly endorse MMT.

On monetary policy, Kaori Takamichi stated in her post-election press conference that the government and the Bank of Japan must closely coordinate, which is basically in line with the Bank of Japan governor Kazuo Ueda's cautious stance. Morgan Stanley believes that market expectations of a near-term rate hike may cool down.

Policy stance has shifted to moderate conservatism

Kaori Takamichi defeated Shinjiro Koizumi in the October 4 runoff, an outcome that surprised the market. However, Morgan Stanley noted that she has shifted from her previous hardline stance to a more "moderate conservative" posture during the campaign to broaden intra-party support.

For example, she no longer reiterates her past statements about cutting the consumption tax or opposing Bank of Japan rate hikes; this pragmatic shift has helped her win more votes. The report also specifically notes that Kaori Takamichi claims to admire former UK Prime Minister Margaret Thatcher and her favorite book is "Downing Street Years." This suggests her policy foundation leans more towards conservatism rather than radical populism.

One of the biggest market concerns about Kaori Takamichi is her fiscal policy stance. Some overseas investors mistakenly think she supports extreme fiscal expansion similar to Modern Monetary Theory (MMT). Morgan Stanley refutes this, stressing such worries are "overblown."

The report analyzes Kaori Takamichi's definition of "Responsible Expansionary Fiscal Policy" in her campaign platform. The core of the policy is to drive employment and income growth, and achieve natural tax revenue increases by strategically mobilizing fiscal resources and investing in sectors that address social problems. More importantly, the policy clearly proposes to "strive to gradually lower the ratio of government net debt to GDP", which is contrary to MMT principles.

The report also points out that Kaori Takamichi's economic policies are heavily influenced by Etsuro Honda, one of the architects of "Abenomics" and former Special Cabinet Advisor. Her policy platform contains orthodox measures like refundable tax credits and abolishing temporary gasoline tax rates. As for market concerns about cutting the consumption tax and raising financial income tax:

Cutting the consumption tax: She herself has said this is not a priority and the likelihood of implementation is low.Raising financial income tax: The report believes the likelihood is "extremely low" in the short term. She proposed in September 2021 to raise the tax rate on financial income over 500,000 yen per year from 20% to 30%, but only after achieving the 2% inflation target, not for immediate implementation.

For investors, this may mean Japan's fiscal sustainability risk is not as great as imagined, and there is no need for excessive panic.

Monetary policy aligns with Kazuo Ueda; rate hike expectations may cool

On monetary policy, Kaori Takamichi has shown respect for the independence of the Bank of Japan. She clearly stated that the government is responsible for setting fiscal and monetary policy goals, while the Bank of Japan is "the authority to determine the best means for monetary policy."

More importantly, her economic judgement aligns with BOJ Governor Kazuo Ueda's cautious stance. For example, both are cautious about the impact of US tariffs, and both believe Japan's current inflation is mainly driven by supply-side factors such as food prices. Morgan Stanley believes this alignment in stance means market expectations for a near-term rate hike by the Bank of Japan may subside.

Of course, the report adds, if a clear economic recovery occurs in the future and wage growth leads to stable inflation at 2%, a Takamichi government would not oppose a Bank of Japan rate hike. This flexible and coordinated attitude with the BOJ will help stabilize market expectations for monetary policy.

Policy focus: national security, domestic investment, and structural reform

Kaori Takamichi's policy manifesto puts emphasis on national security, domestic investment, and structural reform. "Economic security" is the top priority. The report lists her key policies that are highly relevant for investors:

Strengthening national defense capability: Plans to review the three defense documents, with the goal of increasing defense-related spending to 2% of GDP by FY2027. Notably, the report thinks "defense-related spending" here may include investments in infrastructure, energy, healthcare, agriculture, etc.—the broad sense of security fields.Promoting investment in key areas: Plans major tax incentives to promote investment in sectors crucial to economic security, explicitly naming AI, semiconductors, perovskite and solid-state batteries, digital technology, quantum, nuclear fusion, biotechnology, aerospace, shipbuilding, and innovative pharmaceuticals.Establishing a “Foreign Investment Review Committee”: Aimed at reviewing inbound investment from an economic security perspective, possibly drawing market attention.Other reforms: The policy list also includes tackling rising prices (abolishing temporary gasoline taxes), enhancing energy security (advancing next-generation innovative nuclear reactors), food safety (agricultural structural reform), etc.

 

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