Deja vu for Japan markets as Abe-disciple Takaichi’s victory jolts investors

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By Ankur Banerjee and Laura Matthews

SINGAPORE/NEW YORK (Reuters) -Sanae Takaichi’s surprise victory to become Japan’s next prime minister has left investors wondering whether the protégé of the late Shinzo Abe could usher in similar stimulus policies that may boost stocks but leave the yen fragile.

Takaichi, a long-time advocate of the former prime minister’s “Abenomics” expansionary policies, has called for higher spending and tax cuts to cushion the rising cost of living and has criticised the Bank of Japan’s decision to raise interest rates.

Her stance, though, has been relatively softer than last year. The initial reaction from investors to Takaichi’s victory was to send Japanese shares to record highs, sell long-end government bonds and take the yen down past the psychologically important 150 per U.S. dollar level.

Investors are also drawing parallels to when Abe became Japan’s prime minister in 2012, after which he ushered in an era of fiscal stimulus measures through government spending and monetary easing from the Bank of Japan.

The Nikkei more than doubled in the nearly 8 years Abe was at the helm. His policies have also been credited with helping usher in corporate governance reforms that lifted the Japanese shares to record highs since then.

The Nikkei soared nearly 5% in the two trading sessions since Takaichi’s win, closing at a record high on Tuesday.

“Abenomics was significant for Japan’s capital markets and there is a good chance that Takaichi’s win is a big shift in market perception from the previous two prime ministers who were more ‘business as usual’,” said Van Luu, global head of solutions strategy for fixed income and foreign exchange for Russell Investments in London.

There are significant differences though between now and when Abe took over, analysts said, pointing out that Japan faces inflation right now compared to deflation over a decade ago. The impact of U.S. tariffs is also another big unknown.

The yen, on the other hand, depreciated about 18% in the same period to trade just below 105 per dollar when Abe left office in September 2020. It was at 86 when Abe became the prime minister in December 2012.

On Tuesday, the yen last fetched 150.67. Receding expectations of another BOJ rate hike this year has left the yen vulnerable, with intervention risks also looming.

The yen has risen over 4% in 2025, making it a laggard among major peers as it failed to take advantage of a weakening dollar due to long-drawn out negotiations with the U.S. over tariffs and a cautious central bank unwilling to hike rates in a hurry.

“There may be tension with the BOJ given Takaichi’s dovish tilt and inflation may constrain the ability of the BOJ to be accommodative, but her win is positive for nominal growth,” Russell’s Luu said.

Japanese government bond yields under Abe’s leadership slumped to near zero. After years of huge bond buying failed to fire up inflation, the BOJ cut short-term rates below zero in January 2016 to fend off an unwelcome yen rise.

The BOJ adopted yield curve control (YCC) eight months later by adding a 0% target for 10-year bond yields to its -0.1% short-term rate target. The BOJ has since phased out YCC and is on a tightening path, with its short-term policy rate at 0.5%.

The 10-year yield was hovering near a 17-year high at 1.675% on Tuesday.

Much of the focus in the aftermath of Takaichi’s victory has been on rising fiscal risks, with super-long Japanese government bond yields hitting record highs over worries around the fiscal health of a country with a massive debt load.

“Whilst the fiscal outlook is cloudy at the moment, it is clear to see that Japan will adopt mildly pro-growth policies and remain conservative on fiscal expansion,” said Matthias Scheiber, senior portfolio manager and the head of the multi-asset team at Allspring Global Investments.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said unlike Abe, Takaichi faces rising inflation, record-high debt near 216% of GDP, and a central bank that’s tightening, not easing.

“That leaves far less room for bold fiscal or monetary moves.”

(Reporting by Ankur Banerjee in Singapore and Laura Matthews in New York; Editing by Kim Coghill)