Japan stocks at record high on appointment of new Prime Minister Takaichi

Profit-taking emerged after early sharp gains

The yen remains weak

When Liberal Democratic Party leader Sanae Takaichi, who advocated fiscal and investment expansion, was chosen as prime minister on the 21st, the Japanese stock market closed slightly higher as profit-taking emerged.

That day the Nikkei 225 index surged 1.6% in early trading but, as profit-taking poured in, it briefly fell 0.1% and closed up 0.27% at 49,316.06. Anticipation of stimulus measures and additional fiscal spending pushed the yen down 0.5% against the dollar to 151.61 yen.

Analysts noted that given the sharp rise in Japanese stocks over the past month, investors had plenty of reason to sell on the news. Since Prime Minister Shigeru Ishiba announced his intention to resign, the Nikkei has risen about 15%, far outpacing the S&P 500's 3.9% gain. As share prices rose, companies comprising the TOPIX 500 are trading at 16.2 times forward earnings for the next 12 months.

Of the Tokyo Stock Exchange's 33 sector indices, 17 were in positive territory.

During the campaign, Takaichi pledged that the government would spend and invest more in strategic industries such as defense, technology, cyber security and nuclear energy.

In a pact, the LDP and the Japan Innovation Party said the aim was to expand private-public investment based on a responsible but expansionary fiscal policy and to streamline government operations through spending reforms.

James Aishi, a portfolio manager at Marlborough Asset Management, said, "Through the coalition, Takaichi's extreme expansionary policies that investors feared during the LDP campaign will be seriously limited." "Therefore, there will be no second phase of the Takaichi trade," he said.

Indeed, on that day investors sold stocks across sectors in Tokyo that had risen as policy-related plays tied to Takaichi, ranging from defense and cyber security firms to construction stocks. As soon as Takaichi's Diet appointment was confirmed, defense equipment maker Mitsubishi Heavy Industries fell 3.3% and Penta-Ocean Construction fell 2.0%.

Japanese government bond yields spiked on concerns that government spending would expand the fiscal deficit, but that day they reversed from multi-year highs and fell.

Meanwhile, Takaichi pledged to address gender gaps in politics and appointed Satsuki Katayama, a member of the House of Councillors, as finance minister. Katayama is Japan's first female finance minister. Katayama is known to favor a "strong yen" stance, making the appointment significant amid growing discontent and concern over the weak yen and rising prices.

Amid continued political uncertainty the yen remained weak. The yen fell to 151.61 to the dollar, approaching this month's eight-month low of 153.37. Currently, overnight index swaps are pricing in about a 10% chance of a BOJ rate increase next week.

Shinichi Ichikawa, a senior fellow at Pictet Asset Management, said, "This coalition will weaken and she will have to choose the safe path."

Taro Kimura of Bloomberg Economics said, "Ishin's participation could restrain fiscal generosity while leaving the door open for investment in strategic areas such as AI."

Kim Jeong-ah, contributing reporter kja@hankyung.com