Yen and Japanese government bonds plunge, Japanese stocks surge! The market launches the "Sanae Takaichi trade" in response to the return of "Abenomics."

As Sanae Takaichi, considered a disciple of the late Japanese Prime Minister Shinzo Abe, wins the ruling party's leadership election, Japan's financial markets are rapidly pricing in the potential return of "Abenomics".

Sanae Takaichi is about to become Japan's new Prime Minister, and the market expects she will restart an economic agenda centered on large-scale fiscal stimulus and ultra-loose monetary policy. This has quickly ignited the Japanese stock market and triggered sharp volatility in the foreign exchange market.

After the Tokyo market opened on Monday, the Nikkei 225 Index surged over 4%, marking its biggest single-day gain in months. The TOPIX index rose by 3%.

Meanwhile, the yen weakened sharply by 1.5% against the US dollar, approaching the critical level of 150, which has attracted much attention. The yen has already fallen to a historic low against the euro.

The bond market also experienced dramatic fluctuations, as concerns over future fiscal expansion drove long-term interest rates higher. The yield on Japan’s 40-year government bond briefly jumped 14 basis points to 3.52%.

These movements reflect that investors are actively deploying the so-called "Takaichi trade". Wallstreetcn wrote that the market generally expects Sanae Takaichi to promote fiscal expansion and hold a right-leaning political stance, and is considered a disciple of the late Prime Minister Shinzo Abe. She advocates maintaining easy monetary policy and believes the Bank of Japan should not raise interest rates.

Traders say the return of "Abenomics" may further weaken the yen, boost stocks, and cause long-term Japanese government bond yields to rise significantly. According to Bank of America Merrill Lynch strategists, Takaichi’s victory may lead to a weaker yen and a steepening Japanese government bond yield curve.

Policy Blueprint of the "Abenomics" Successor

According to CCTV News, on October 4 local time, the election results for the president of Japan’s ruling Liberal Democratic Party were announced, with Sanae Takaichi defeating multiple rivals including Shinjiro Koizumi and successfully becoming the new LDP president.

Takaichi’s economic policy advocacy carries a distinct "Abenomics" imprint. At a press conference following her election, she pledged to take swift measures to address inflation, with policy options including increased subsidies to local governments and even the possibility of cutting the consumption tax.

On monetary policy, Takaichi’s stance is even more explicit. She advocates that the government and the Bank of Japan must align policy and communicate closely until demand-driven economic growth is achieved.

Reportedly, she has previously called BOJ rate hikes "stupid", and this strong statement has prompted some analysts to change their expectations for a BOJ rate hike in October.

Market Bets on Fiscal Expansion and Loose Monetary Policy

Takaichi’s victory came as a surprise to many investors who had expected the more fiscally conservative Shinjiro Koizumi to win.

Anna Wu, Cross-Asset Investment Strategist at VanEck Australia, told Bloomberg that this "could be a positive surprise for the stock market".

Investors are preparing for possible fiscal expansion in Japan.

A senior broker at a major Japanese securities firm revealed, “The ‘Takaichi trade’ is basically positive for stocks, but due to the risk of substantial new fiscal stimulus, Japanese government bonds and the forex market may experience some volatility.”

The market expects that Takaichi will prioritize economic growth rather than strict fiscal discipline.

Bonds Under Pressure, Yields May Rise

Although the stock market is cheering, the bond market faces different pressures. The market is concerned that larger scale fiscal spending means the government will need to issue more bonds, increasing Japan's debt burden.

Shoki Omori, Chief Strategist at Mizuho, warned that if the policy of issuing more Japanese government bonds is not accompanied by a "safety net", bonds may face selling pressure. This view is consistent with Bank of America Merrill Lynch’s forecast that the Japanese government bond yield curve may become even steeper.

For investors, the rise of Takaichi signals a new trading paradigm. The market will closely watch how she balances her commitment to boost growth with the long-term challenge of managing government debt, and how she will influence the future policy path of the Bank of Japan.

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