Market Euphoria Ends for Takaichi as Yen, Japan Bonds Sink
Sanae Takaichi
(Bloomberg) — Japanese Prime Minister Sanae Takaichi is facing her first major market test as jitters over the government’s impending stimulus package threaten to derail the rally her election helped ignite.
Concerns that Takaichi’s spending plans will worsen Japan’s fiscal health have sent government bonds tumbling and exacerbated weakness in the yen, which has slipped further into the danger zone for potential intervention. While stocks regained some ground on Thursday, the Nikkei 225 is still headed for a weekly loss of over 1%.
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With Takaichi’s administration expected to unveil its long-awaited economic package on Friday, the “sell Japan” trade may be only just beginning. The plan will incorporate ¥17.7 trillion of spending from the general account, topping the ¥13.9 trillion rolled out by Takaichi’s predecessor, according to documents seen by Bloomberg.
Read: Japan’s Takaichi Is Set to Unveil $112 Billion in Fresh Stimulus
Pressure is growing from JGB yields at multi-decade highs and the yen weakening to its lowest level since January against the dollar. The new government’s additional bond issuance will be bigger than last year, according to people with knowledge of the matter.
“If Takaichi loses policy credibility, then investors will start selling all of the assets,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management. “If there’s a sense that this idea of policy error is growing in Japan, then for sure we would be adding to the short end of the curve trade.”
This week’s cross-asset selloff underscores the fragility of the so-called Takaichi trade, which lifted Japanese equities to record highs in October on bets her fiscal expansion would revive growth. The Nikkei had wiped out all of its gains since Takaichi’s Oct. 21 election by Nov. 19, although it rebounded 2.7% Thursday.
The yen has also slumped past the 157-per-dollar level, with gains in the greenback adding to the currency’s weakness as expectations for a Federal Reserve rate cut recede. If it drops beyond 158.87, that would mark its weakest level since July last year.
Read: ‘Sell Japan’ Trade Emerges as Fiscal Worry, China Tensions Weigh
“The honeymoon period has ended,” said Amir Anvarzadeh, Japan equity strategist at Asymmetric Advisors Pte. While traders initially “all cheered” for Takaichi and her pro-stimulus policies, many are now “drowning,” he said.
It’s not just fiscal spending fears souring sentiment, Anvarzadeh said. In the past two weeks, Takaichi has scrapped the government’s annual budget-balancing goal, vowed to make Japan’s corporate governance code less shareholder-focused, and triggered a diplomatic spat with Beijing. Those moves have rattled investors, pressuring stocks and sending yields surging, he said.
The unveiling of the stimulus will be the next key test. The announcement could trigger a “triple dip” — simultaneous declines in stocks, bonds and the yen — according to Hiroshi Namioka, chief strategist and fund manager at T&D Asset Management Co. Moves this week already bear resemblance to the market turmoil that hit the UK under Liz Truss in 2022, he said.
Japan’s long-end bond yields could climb further if Takaichi seeks “a big budget,” while the yen may weaken toward 160 per dollar, said Alex Loo, macro strategist at TD Securities in Singapore.
Any further slide could prompt intervention by authorities in Japan, Loo said. A gauge tracking the speed of the currency’s decline — a key trigger for authorities to act — has approached levels consistent with previous interventions several times in the past month.
A weaker yen typically supports Japanese equities, especially exporters, but fears over Tokyo’s spat with Beijing, together with a global pullback in tech and crypto, have left the nation’s benchmarks with little relief. Japan’s blue-chip Nikkei gauge has lagged the S&P 500 and MSCI’s global benchmark so far this month.
The Japan-China standoff comes after Takaichi became the first sitting Japanese leader in decades to publicly link a Taiwan Strait crisis with the possible deployment of Japanese troops. Tensions have ramped up as Beijing told Tokyo it would suspend Japanese seafood imports, according to a Kyodo report. China has also frozen regulatory reviews for new Japanese films, according to people familiar with the matter.
“What you get is a very perverse mix where despite a weaker yen, the Nikkei doesn’t do well,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. “Despite higher yields, the yen doesn’t do well.”
Read: Japan Retail, Tourism Shares Fall After China Travel Warning
While near-term volatility may persist, some investors still see Takaichi’s spending plans supporting Japan’s assets over time. The injection of government funds could heat up the economy, bolstering the case for rate hikes and strengthening the yen, said Thomas Mathews, head of Asia-Pacific markets at Capital Economics.
“Hiking will be hard to avoid if she does fiscal stimulus and the economy starts running hot,” said Mathews. “That could trigger a sharp rebound in the yen” next year, he added.
–With assistance from Momoka Yokoyama and Masaki Kondo.
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