The Japanese stock market is likely to react positive after pro-stimulus candidate Sanae Takaichi’s unexpected win in the ruling party’s leadership election.
However, on the other hand, Japan’s yen and long-term government bonds are likely to come under pressure, according to market experts.
Michael Brown, senior research strategist at Pepperstone, was quoted as saying by Bloomberg that the outcome was “quite an unexpected result” and not what the markets had been anticipating.
“Takaichi’s win is “likely to be yen negative, on the dovish BOJ repricing, coupled with a steeper JGB curve given her looser fiscal views, though both of those combined should be a boost for the Nikkei,” Brown said.
Why this is a good news for Japanese stock market?
Japan’s benchmark Nikkei logged a record closing high of 45,769.50 on Friday, topping the record set the week before, as investors bet whoever succeeded Ishiba would be more dovish.
Resona Holdings strategist Hiroki Takei, was quoted as saying by Reuters, “This could be considered a positive surprise for stock prices. If short-covering is triggered, the rally could gain momentum, potentially pushing the index toward the 47,000 level.”
Takaichi is poised to become Japan’s first female prime minister later this month through a parliamentary vote, following her victory in the Liberal Democratic Party leadership election on Saturday.
Many investors had anticipated the position would go to political heir Shinjiro Koizumi, who was viewed as favoring a more fiscally cautious approach while allowing the Bank of Japan to continue its path toward policy normalization, according to Bloomberg report.
Even before Takaichi’s victory, bond investors were cautious about increased fiscal spending, while opposition parties pushed for tax reductions. Alongside expectations of potential BOJ rate hikes, 10-year yields have remained near their highest levels since 2008. This has contributed to a stronger yen against the dollar over the past week, even as the Nikkei 225 reached a new all-time high, supported by a global surge in tech stocks.
Mari Iwashita, executive rates strategist at Nomura Securities, was quoted as saying by Bloomberg that market expectations for an October rate hike diminish, “the BOJ is not expected to intentionally move forward with raising rates.”
(With inputs from Bloomberg and Reuters)
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