Sanae Takaichi’s unexpected victory in the Liberal Democratic Party (LDP) leadership election on 4 October immediately triggered a market reaction of higher stock prices and a weaker yen. One month has passed since then.
While the Nikkei has remained in elevated territory above 50,000, the USD/JPY exchange rate has broadly held its ground just below the key 155 level.
Long-term Japanese government bond yields have indeed risen, but not in a way that has broken out of their recent range. It is fair to say that financial markets have remained broadly stable.
Behind this stability is the fact that, following Komeito’s withdrawal from the coalition, Takaichi promptly secured her path to becoming prime minister by forming a new coalition with the Japan Innovation Party (Ishin).
She then successfully navigated US President Donald Trump’s visit to Japan and a meeting with Chinese President Xi Jinping in South Korea immediately after taking office. These displays of pragmatic political leadership appear to have reassured markets.
These same qualities have also resonated with the public. According to the latest Asahi Shimbun opinion poll published on 16 November, the approval rating for the Takaichi Cabinet stood at 69%, barely changed from the 68% recorded immediately after the administration’s launch in October.
However, last week brought signs that two concerns long held by foreign investors may be resurfacing:
(1) Japan–China relations, and
(2) fiscal discipline.
Depending on how the Takaichi administration responds this week, the “Takaichi risk” could once again become a focus for markets.
