"Takashi Trade" Sparks Market! Yen Plummets to 157.5, Stock Market Soars, Bonds Collapse

The Liberal Democratic Party led by Sanae Takaichi has achieved an over two-thirds supermajority in the House of Representatives, marking a historic turning point in Japanese politics. Markets are betting that Takaichi’s policies will drive expansionary fiscal measures, causing the yen to weaken against the US dollar to around 157.50. Japan’s stock market benefits from policy tailwinds and has risen strongly, while the bond market remains under pressure due to expectations of fiscal expansion. This victory not only consolidates Takaichi’s ruling position but also signals Japan’s move toward an economic path supported by large-scale borrowing to fund public spending.

Core Logic of Takaichi’s Trade: Supermajority Opens the Door to Fiscal Expansion

Takaichi’s supermajority seats remove political obstacles to large-scale fiscal stimulus plans. In Japan’s parliamentary system, holding over two-thirds of seats means the ruling party can bypass the House of Councillors’ veto and pass legislation with a two-thirds majority in the House of Representatives. This political structure grants Takaichi’s government unprecedented policy-driving power, enabling the implementation of aggressive fiscal stimulus without excessive compromise.

The core logic of Takaichi’s trade is based on expectations of expansionary fiscal policies. Markets generally believe that her government will finance large public expenditures through debt issuance, including infrastructure projects, defense upgrades, tech innovation subsidies, and social welfare expansion. This policy mix resembles the late Prime Minister Shinzo Abe’s “Abenomics,” but potentially on a larger scale and with greater intensity.

Such expansionary policies not only increase Japan’s already heavy debt burden but also have systemic effects on exchange rates, bonds, and equities. Japan’s government debt exceeds 250% of GDP, the highest among developed countries. Against this backdrop, further fiscal expansion raises concerns about debt sustainability while providing short-term economic stimulus.

The market impact of Takaichi’s trade can be summarized through three main transmission mechanisms: increased fiscal deficit leading to higher government bond supply, pushing up yields and lowering bond prices; a combination of loose monetary policy and expansionary fiscal policy causing yen depreciation; and increased liquidity and improved corporate profit expectations driving stock gains. These effects manifested immediately after the election results.

Yen Under Pressure at 157.50, Focus on Currency Intervention

Following the election results, the USD/JPY exchange rate weakened to around 157.50, about 0.5% weaker than pre-election levels. This depreciation reflects the market’s immediate pricing of Takaichi’s policies: expansionary fiscal measures imply more government bond issuance, and the Bank of Japan (BOJ), to support government financing, may be forced to maintain loose monetary policy, which depresses the yen.

While a weaker yen benefits exporters (by boosting the yen value of Japanese products abroad), it also brings multiple negative effects. First, rising import costs will push up domestic inflation and erode consumer purchasing power. Second, yen depreciation may trigger capital outflows as foreign investors see the value of yen-denominated assets decline. Third, excessive depreciation could provoke international accusations of currency manipulation.

Investors are closely watching whether Japanese authorities will intervene in the forex market. The Ministry of Finance and BOJ have historically intervened during rapid yen declines, selling dollars to buy yen to support the currency. However, under Takaichi’s framework, intervention may be limited, as markets expect structural policy shifts rather than short-term volatility.

Currently, the market views 158.00 as a key psychological threshold for potential intervention. If the yen continues to weaken past this level, official verbal interventions or actual yen purchases could occur. Nonetheless, given Takaichi’s inclination toward a weak yen to support exports and inflation targets, large-scale intervention remains less likely.

Multiple Effects of Yen Depreciation

Beneficial for exporters: Toyota, Sony, and other multinationals see increased yen value of overseas earnings

Rising import costs: Energy and raw material prices climb, squeezing corporate profits

Inflationary pressures: Higher import prices feed into consumer prices, eroding real purchasing power

Capital outflows risk: Foreign investors’ yen-denominated assets decline in value, possibly leading to market exits

Debt burden easing: Yen-denominated debt’s real value decreases

Stock Market Risk Appetite Rises, Funds Shift from Tech to Cyclical Sectors

Supported by policy continuity and stimulus expectations, Japanese and Asia-Pacific stock markets show strong risk-on sentiment. The so-called Takaichi trade reflects investor optimism about low interest rates and fiscal support. The Nikkei 225 rose over 2% on the post-election trading day, and the TOPIX hit recent highs, indicating market confidence in her economic policies.

This rally is not uniform. Capital flows are shifting structurally, with funds moving from high-valuation tech stocks to cyclical and value sectors. Banks, construction, and industrial stocks are main beneficiaries, as these sectors directly benefit from fiscal expansion and infrastructure investments.

The rise of cyclical stocks signals expectations of tangible economic growth. If Takaichi’s government launches large infrastructure projects, construction firms will secure government contracts; increased corporate investment benefits industrial equipment manufacturers; and economic growth boosting credit demand will expand bank lending. These are classic channels of fiscal stimulus transmission.

Despite macroeconomic uncertainties—such as global slowdown and geopolitical risks—the ruling party’s absolute majority provides short-term political certainty, supporting asset valuations. In financial markets, policy uncertainty is often a major risk factor. Takaichi’s victory removes this uncertainty, at least for the coming years, signaling that Japan will pursue an expansionary fiscal path.

However, the stock market’s strong performance raises valuation concerns. If fiscal stimulus fails to effectively boost the economy or if debt crises emerge, current optimism could quickly reverse. Investors should closely monitor the government’s actual policy implementation rather than rely solely on election promises.

Bond Market Collapse Risks, Yields Surge as Debt Risks Mount

Under the Takaichi framework, the bond market faces significant pressure. Anticipated increased fiscal spending implies higher government bond supply, pushing up yields on Japanese Government Bonds (JGBs). Post-election, the 10-year JGB yield rose about 5 basis points to 1.35%, signaling market concern over supply increases.

This bond sell-off (price decline, yield rise) reflects doubts about fiscal sustainability. Investors worry that without clear debt management plans, Japan’s long-term debt-to-GDP ratio could breach 260-270%. The pressure on bonds also limits the BOJ’s room to tighten monetary policy. While the BOJ might want to gradually exit quantitative easing and raise rates to combat inflation, increased government borrowing makes rate hikes costly, raising interest payments and risking fiscal strain. As a result, the BOJ may be compelled to maintain low rates and bond purchases.

This “fiscal dominance” scenario is the greatest potential risk of the Takaichi trade. When monetary policy becomes subordinate to fiscal needs, the independence and flexibility of the central bank are compromised. If inflation spirals or markets crisis, the BOJ will lack effective tools. Historically, fiscal dominance often precedes sovereign debt crises.

The yield spread between Japanese and US 10-year bonds is also a focus. Currently, US 10-year yields are around 4.5%, while Japan’s are at 1.35%, a spread over 300 basis points. Such a large spread typically attracts capital flows from Japan to the US, further weakening the yen. Under the Takaichi trade, this spread is unlikely to narrow significantly in the short term.

Global Macro Interactions: US Data Influences Takaichi Trade

Beyond domestic factors, the Takaichi trade is affected by global macro trends. Upcoming US non-farm payrolls and inflation data this week will influence the Fed’s rate outlook. Markets currently see less than a 20% chance of a rate cut next month, implying continued dollar strength. In the context of global liquidity tightening and Japan’s fiscal expansion, exchange rates and cross-border capital flows will interact complexly.

Strong US economic data could lead the Fed to keep rates high longer, supporting the dollar and further pressuring the yen. Conversely, signs of US economic weakness might prompt earlier rate cuts, narrowing the US-Japan interest rate gap and easing yen depreciation pressures. The sustainability of the Takaichi trade largely depends on this macro environment.

Commodity markets also reflect these interactions. Gold prices rise on safe-haven demand, viewed as a hedge against debt risks and currency depreciation. Energy prices retreat due to easing geopolitical tensions, with reduced Middle East risks lowering supply disruption concerns. These price movements influence Japan’s import costs and inflation expectations.

Overall, the Takaichi trade provides clear directional signals but also entails significant risks. Investors need to balance policy tailwinds against debt risks, closely monitoring actual policy implementation and global macro developments.