Japan stocks hit record high on Takaichi landslide; bond and yen declines contained

10-year JGB yield up 4bp to 2.27%; yen steady

"If stimulus is emphasized, bond and yen selling could emerge"

Japanese equities notched a fresh all-time high on the 9th (local time), buoyed by a resounding general-election victory for the ruling party led by Prime Minister Sanae Takaichi. Compared with market fears, declines in Japanese bonds and the yen were limited.

According to Bloomberg on the 9th (local time), the Nikkei 225 Stock Average at one point jumped 4.4% and finished up 3.89% at 56,363.94.

The yen strengthened 0.2% against the dollar to 156.85. The 30-year JGB yield rose intraday to as high as 3.615%, but later ended at 3.545%, down 0.5 basis point (1bp=0.01%). The benchmark 10-year JGB yield rose 4bp to 2.27%. Currency and bond markets were relatively stable after Prime Minister Takaichi emphasized fiscal sustainability and the finance minister warned authorities were watching the yen’s moves.

Semiconductor equipment maker Advantest posted the biggest gain in the Nikkei. With chip-related shares and defense companies rising sharply, the so-called “Takaichi trade” drew attention. The Takaichi trade refers to buying Japanese stocks and selling bonds and the yen on expectations the government will pour massive funds into stimulus and increase debt to finance it.

Martin Choudhury, founder and managing director of BCMG, said large-cap names—including banks, defense-related companies and high-quality exporters such as Toyota Motor—are likely to perform well. He added, however, that “another wave of volatility could arise in bond and FX markets if Takaichi is not careful with her remarks.”

The yen pulled back from around 160 per dollar, a level where Japanese authorities had previously intervened to defend the currency. The finance minister’s phrase that authorities are “watching with a very strong sense of urgency” is generally read as a powerful signal that the likelihood of actual intervention is rising. Analysts said, however, that FX traders would need more hawkish messaging—such as hints the Bank of Japan could raise rates earlier—before moving to buy the yen.

Rajiv De Mello, a global macro portfolio manager at Gama Asset Management, said Takaichi’s landslide will have a positive medium- to long-term impact on Japanese equities. He added, however, that “a sharp rise in long-term government bond yields could become a headwind for Japanese stocks,” noting that “moves in the JGB market will be key.”

Homin Lee, chief macro strategist at Lombard Odier, said JGB yields may show some volatility, but if moves become too large, expectations would grow that the government could take steps to stabilize markets. He added that if JGB yields rise excessively and start putting pressure on other sovereign bonds such as U.S. Treasuries, the possibility of pressure from overseas cannot be ruled out.

Global asset managers including Schroders and J.P. Morgan Asset Management cut exposure ahead of the election to Japanese government bonds—especially ultra-long JGBs. Takaichi’s proposal to temporarily cut the food consumption tax, renewed concerns over Japan’s fiscal sustainability and low liquidity are cited as key drivers of the selling.

Japan’s Finance Minister Satsuki Katayama sought to reassure markets, saying the scheduled tax-cut plan would not require additional JGB issuance. In a TV appearance the previous day, Katayama stressed she is communicating closely with U.S. Treasury Secretary Scott Bessent, adding that she shares responsibility with Bessent for maintaining stability in the dollar-yen exchange rate.

Some market participants said Takaichi may feel less pressure to roll out stimulus measures as a result of the landslide. Masanari Takada, a quant and derivatives strategist at J.P. Morgan Securities Japan, said, “This result keeps the bond market on edge, but the LDP’s landslide could give Prime Minister Takaichi political room to listen to concerns from the bond market.”

Short-dated bond yields and overnight index swaps are adjusting on expectations the Bank of Japan (BOJ) could raise rates at its April meeting. The market sees roughly a 75% probability of a 25bp rate hike in April, and has priced in nearly a 100% probability of a rate cut at the June meeting.

According to NHK, the LDP secured an overwhelming supermajority on its own—more than two-thirds—in the 465-seat House of Representatives. The ruling coalition also expanded its majority by a wide margin. This enables Prime Minister Takaichi to push ahead with plans for increased fiscal spending and investment to invigorate the economy.

Kim Jung-a, contributing reporter kja@hankyung.com