Equities Surge, Yen Slides: Japan’s Markets React to Takaichi’s Economic Vision

Anjali SinghOctober 4, 2025October 4, 2025

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Japanese financial markets were jolted into motion this week as Sanae Takaichi secured leadership of the ruling Liberal Democratic Party (LDP), all but confirming her as Japan’s next prime minister. The result triggered a strong rally in equities, a selloff in government bonds, and renewed downward pressure on the yen—signaling that investors are recalibrating expectations for Japan’s economic future under Takaichi’s watch.

With promises of aggressive fiscal expansion, corporate support, and close alignment with the Bank of Japan, Takaichi has struck a bullish chord with equity investors—but her policies may complicate the path for bondholders and currency markets.

A New Economic Direction

Takaichi, a former internal affairs minister and longtime advocate of supply-side economics, has made no secret of her ambitions to stimulate Japan’s economy through a mix of government spending, tax breaks, and monetary easing. Echoing the pro-growth doctrine of her mentor, former Prime Minister Shinzo Abe, Takaichi has pledged to push Japan into a “new phase” of revitalization.

The market reaction was swift. The Nikkei 225 surged over 3% on the day following her victory, closing at a new all-time high of 45,769.50. Investors welcomed the clarity and decisiveness in her leadership, especially after months of political drift and policy uncertainty.

Analysts expect the rally to continue in the near term, driven by expectations of fiscal stimulus packages, increased public investment, and deregulation. Sectors such as infrastructure, technology, and defense are seen as potential winners.

The Bond Market Pushes Back

In stark contrast, the bond market responded with a clear vote of concern. Yields on Japanese Government Bonds (JGBs) climbed sharply, particularly on the 10- and 30-year maturities, as fears grew over a potential surge in debt issuance and pressure on the Bank of Japan to maintain accommodative policies.

The 10-year yield rose to 0.97%, the highest since 2011, while longer-term yields saw a steepening in the curve. Investors are increasingly worried that Takaichi’s spending plans could lead to a ballooning budget deficit, possibly overwhelming demand for JGBs unless the BOJ continues its purchases.

Bond traders are now bracing for what some have termed a “policy collision“—with fiscal authorities accelerating spending while the central bank faces growing calls (especially internationally) to normalize policy.

Yen at a Crossroads

The Japanese yen, often viewed as a safe-haven currency, is showing signs of renewed weakness. Following Takaichi’s win, the yen initially firmed slightly, but resumed its downward trend against the dollar, trading near ¥147.50 per USD—down 1.8% from last week.

While a weaker yen could boost exports and corporate earnings—supporting stock prices—it also threatens to increase import costs and worsen consumer price inflation, which has already ticked up in recent months.

Takaichi’s calls for the BOJ to “work closely with the government” to achieve a 2% inflation target have sparked concerns that currency policy may be subordinated to growth objectives, weakening the yen further.

Currency strategists believe the yen could drop past ¥150, especially if U.S. interest rates remain elevated while Japan holds firm on easy money policies.

Mixed Reactions from the Business Community

Japanese corporates have largely reacted positively to the leadership shift. The Japan Business Federation (Keidanren) issued a statement congratulating Takaichi and expressing hope for “pro-growth, innovation-friendly policies.”

Executives from construction and technology sectors applauded her infrastructure-focused stimulus pledges, while some exporters welcomed the yen’s decline, which boosts overseas profits.

However, financial institutions and insurers expressed more caution, particularly regarding bond volatility and the sustainability of debt-financed stimulus.

A senior executive at a major Tokyo-based asset manager said:

“Markets like stimulus in the short term. But long term, we need assurance that fiscal policy won’t spiral into unsustainable territory. The yen and bond yields are flashing warning signs.”

BOJ’s Role in the Spotlight

The Bank of Japan (BOJ), led by Governor Kazuo Ueda, now finds itself in a politically sensitive position. Takaichi’s vision depends heavily on continued monetary accommodation, yet inflation has recently edged above 2.5%, prompting speculation about tightening.

Ueda has previously hinted at gradual normalization, but with Takaichi’s administration likely to lean on the BOJ for policy coordination, those plans could be delayed—or even reversed.

Economists now forecast that the BOJ may pause its plans to raise interest rates at upcoming meetings and may even expand asset purchases if bond markets become unstable.

The central bank’s independence could be tested in the months ahead, as it balances between market credibility, inflation control, and political expectations.

Global Implications

Japan’s political and economic shift under Takaichi is being closely monitored by global investors and policymakers. As the world’s third-largest economy, any significant move in Japanese markets has ripple effects across Asia and beyond.

A weaker yen could put pressure on Asian currencies as Japan regains competitiveness.
Rising bond yields in Japan could lead to capital outflows from emerging markets as global risk premiums adjust.
If Japan accelerates defense and technology spending, regional geopolitical dynamics may also shift, particularly with China and South Korea.

Looking Ahead

Sanae Takaichi’s ascent marks a decisive shift in Japan’s political and economic course. While markets initially welcomed her bold approach, the path forward is anything but simple.

The Nikkei’s rally shows investor enthusiasm—but it’s built on the assumption of continued policy support, low rates, and rising corporate earnings. If inflation rises or the BOJ changes course, the equity market could be vulnerable.

The yen’s direction remains key: too much depreciation could invite foreign criticism and domestic inflationary pain, while a sudden strengthening could hurt Japan’s fragile export-led recovery.

And in the bond market, growing tensions between fiscal ambitions and monetary limits could come to a head in early 2026, when budget proposals and BOJ policy decisions collide.

For now, though, Japan’s investors are riding a wave of optimism—betting that Takaichi’s bold new direction will deliver results without igniting new crises.