A landslide, the kind Japan has rarely seen. By winning 68% of the seats in the House of Representatives, Liberal Democratic Party leader Sanae Takaichi has secured a stable political majority - since October, she had been operating with barely 41% of the seats. "The victory was expected, but not this wave, because the LDP was moribund. It changes the game, with an immediate depricing of political risk", notes Jean-Thomas Heissat, strategist at CPRAM.
Equity markets have welcomed it, with the Nikkei 225 up 5% since her election. With Takaichi in office, it has swelled by nearly 25%. Does that point to a swift bout of profit-taking? "The government is very assertive and has not yet translated its budgets into concrete measures. As in China, the question of effective implementation of the stimulus policy arises. For some, the market priced it in too quickly; for others, it did not”, the strategist explains.
The Takaichi stimulus program, built around a freeze of the 8% consumption tax on food products and support for sovereign industries, should notably boost defence and semiconductors: the three best performers in the MSCI World this year have become Japanese chipmaker Kioxia Holdings (+97%), its peer JX Advanced Metals (+60%) and the military equipment manufacturer Kawasaki Heavy Industries (+51%).
More reassuring than expected
In a note published this week, UBS points to more structural factors underpinning the Japanese rally. "The election is only a beginning, with catalysts still to come: the strong mandate given to Takaichi will make it possible to reform corporate governance as planned in June; the Topix reform in October will also reconfigure companies' weightings in the index, to favour those with more cash, a larger free float and better capital efficiency.” The index jumped 5% after the election result.
The Prime Minister's expansionary budget could have worried investors, given Japan's already exorbitant debt level (230% of GDP). However, long rates paradoxically fell, with the 10-year rate dropping to 2.13%, from 2.29% before the election. "The move in rates is contradictory, but Takaichi has freer rein than expected: that suggests she will be less populist, more market-oriented, and that reassures the bond side”, Jean-Thomas Heissat details.
Non-tax financing of spending could also avoid excessive borrowing. Japan's GPIF is being reformed to invest more directly in local companies, and the BoJ recently decided to sell part of its gigantic ETF portfolio (estimated at €515bn), paving the way for more private-sector financing. "Low interest rates and negative net payments in 2024, driven by income from financial assets (~100% of GDP), provide temporary budget relief”, UBS also notes.
Two rate hikes expected this year
That leaves the question of monetary normalization, where the archipelago is still lagging. And here again, the LDP's comfortable victory buys time and leeway. "The BoJ will continue tapering its balance sheet and raise rates this year, probably twice. However, there is no urgency; it can wait for the outcome of spring wage renegotiations”, explains Jean-Thomas Heissat. BoJ Governor Kazuo Ueda met Takaichi for the first time on Monday, and specifically stressed the need to coordinate fiscal and monetary policy.
The yen has strengthened against the dollar since the election, moving from JPY 157 to JPY 153. A comfortable zone for the Japanese administration, far from the BoJ's intervention zone, beyond JPY 158. Finance Minister Satsuki Katayama and top FX diplomat Atsushi Mimura say they remain in contact with Scott Bessent and the US administration to rein in any major fluctuation of the yen.
The only variable being monitored by Western investors: the impact of Japanese monetary moves on purchases of their own debt, as budget spending explodes in Germany or the United States. Jean-Thomas Heissat thus warns of Japanese institutions turning back to Japan. "The real question will be whether Japanese sovereign debt becomes attractive again for domestic investors. Japanese banks could unwind positions to come back home, and the scale of their investments in Europe and the United States is considerable”, he believes.
