'Abenomics Season 2' announced, Nikkei nearing 50,000…concerns of inflation backlash

Sanae Takaichi inaugurated as Japan's first female prime minister

Japanese stocks hit record highs for two consecutive days

Foreign buying on expectations of fiscal expansion

Nikkei rose 0.27% from the previous day

'Money-printing' signaled…will it spur prices?

Mentioned issuing deficit bonds during the election

Government debt forecast to hit a record high next year

Sanae Takaichi, president of Japan's ruling Liberal Democratic Party, was inaugurated on the 21st as the first female prime minister in the 140-year history of Japan's cabinet system. With the start of the Takaichi era, which signaled fiscal expansion and monetary easing as 'Abenomics Season 2,' the Japanese stock market rose and the yen fell. This is the so-called 'Takaichi trade.' However, as Japan enters an inflationary phase, there are also concerns that Abenomics—pursued to overcome deflation—could have adverse effects.

◇ Hardline conservative who broke the glass ceiling

At the prime minister nomination vote held in the House of Representatives (lower house) temporary session that day, Takaichi won 237 votes out of 465, more than half, and became the 104th prime minister. Although Takaichi was likely to be nominated after being elected president of the Liberal Democratic Party on the 4th, the centrist-conservative Komeito, which had formed a coalition for 26 years, left the coalition over differences regarding political funding regulations, making the prime minister's selection uncertain. She was nominated as prime minister after successfully forming a coalition the previous day with the Osaka-based, right-leaning second opposition party, the Japan Innovation Party.

Born in Nara Prefecture in western Honshu, Takaichi graduated from Kobe University's Faculty of Business Administration and the Matsushita Institute of Government and Management. The Matsushita Institute of Government and Management is a private educational institution established in 1979 by Konosuke Matsushita, founder of Panasonic, to train leaders to guide Japan. This is why Takaichi has often cited Matsushita as a person she respects. After experiences including the U.S. Congress, Takaichi was first elected to the House of Representatives in 1993 and entered parliament at the same time as former Prime Minister Shinzo Abe. Since then, she has broken the 'glass ceiling' and established herself as a hardline conservative politician. She is sometimes called the 'female Abe' as she succeeds former Prime Minister Abe's policy line.

◇ Stock rise and yen fall

With the appearance of Prime Minister Takaichi, the Nikkei index closed at 49,316, up 0.27% from the previous day, marking a record high. Following the previous day's first-ever break above 49,000, it rose again that day and stood on the verge of surpassing 50,000. Securities firms analyzed, "Among foreign investors, expectations that Prime Minister Takaichi will pursue fiscal expansion and monetary easing have grown, spreading buying of Japanese stocks." Mitsubishi UFJ Morgan Stanley Securities forecast that the Nikkei index could rise to 51,000 within the year.

That afternoon, immediately after Takaichi's election as prime minister, the yen-dollar exchange rate rose (yen depreciated). In the Tokyo foreign exchange market, the yen-dollar rate traded in the mid-151-yen range, at one point about 0.8 yen higher per dollar than the previous day. The yen, which had been trading in the high-140s per dollar until last month, has been above 150 per dollar since Takaichi was elected LDP president. As expectations grew that, with Takaichi's election—who is considered dovish—the Bank of Japan would find it difficult to raise the policy rate further at the monetary policy meeting on the 30th of this month, yen selling spread.

◇ Concerns that 'money-printing' will spur prices

Critics argue that Abenomics Season 2 is inappropriate in a phase where Japan's consumer prices are rising in the 3% range. They say the 'money-printing' policy is likely to further stimulate prices. This is seen as inconsistent with Takaichi's statement that she would prioritize price measures after taking office.

After Takaichi signaled during the party presidential campaign that she would tolerate issuing deficit bonds, government bond yields have been stirring. The recent 10-year government bond yield reached 1.700% annually, the highest level in 17 years, as concerns over fiscal deterioration spread.

With rising government bond yields, the Japanese government is expected to bear about 13 trillion yen in government bond interest payments next year alone. This would be 24% higher than this year and is expected to be a record high. The fundamental cause is the massive government debt. Last year, the government debt-to-GDP ratio stood at 236.7%, the highest in the world.

Markets are paying attention to Taro Aso, vice president of the Liberal Democratic Party, who is expected to exert influence in the Takaichi administration. Aso, who served as finance minister for a long time, is regarded as a 'fiscal disciplinarian.'

Tokyo = Il-gyu Kim, correspondent / Mansu Choi, reporter black0419@hankyung.com