Japanese stocks and bond yields soared and the yen fell on Monday, after conservative China hawk and potential big-spender Sanae Takaichi won the leadership of the ruling party.
Sanae Takaichi, likely to become prime minister this month, has in the past backed aggressive monetary easing and expanded government spending, echoing her mentor, former premier Shinzo Abe.
However, she toned down on these “Abenomics” calls during the campaign to head the ailing Liberal Democratic Party and replace Prime Minister Shigeru Ishiba.
After winning the top job on Saturday, Takaichi pledged first to implement measures to address inflation and boost the economy, rural areas, and primary industries such as farming and fisheries.
Takaichi “looks more inclined than the others to juice the economy,” said Taro Kimura at Bloomberg Economics.
“Still, with inflation rising and long-term (bond) yields climbing, she will have to balance her stance with reality, in order not to accelerate cost-of-living squeeze and jolt the rate market,” Kimura said.
The Nikkei 225 index of blue chips was up just over four percent in morning trade, while the yen fell against the dollar and hit a new record low against the euro.
Yields on 30-year Japanese bonds also rose sharply, reflecting fears that the country’s already colossal debts — over 200 percent of GDP — will balloon further under Takaichi.
The Bank of Japan began hiking rates from below zero last year, after declaring an end to the “lost decades” of stagnation and flat or falling prices.
The BoJ has kept borrowing costs unchanged since January and Takaichi’s appointment has thrown some doubt on when it might resume.
Marcel Thieliant at Capital Economics, however, stuck to his prediction that the BoJ will increase rates this month.
“No government has tried to openly influence the BoJ’s decision-making in more than two decades, and any attempts to do so are unlikely to be successful,” he said.
“If anything, any fiscal loosening would strengthen the case for tighter monetary policy.”
BMI analysts said that Takaichi’s immediate challenge is to secure the support of at least one opposition party to form a working majority in parliament.
Beyond that, she needs to boost Japan’s economic competitiveness, strengthen its technological and industrial base, and mitigate an ageing and declining population.
“None of these has easy solutions,” BMI said.
Takaichi, 64, who is set to become Japan’s first female prime minister, is seen as an arch-conservative and a China hawk.
One of Takaichi’s first official duties as premier will be receiving US President Donald Trump, who is reportedly set to make a stopover in Japan in late October.
Takaichi said Saturday that she had no plans to overturn Tokyo’s recent trade deal — over which questions remain — with Washington.
Takaichi, a heavy metal drummer in her youth, saw off a challenge from four other candidates to become head of the Liberal Democratic Party.
Markets had priced in a victory by the more socially progressive and fiscally conventional Shinjiro Koizumi, 44, who would have been the youngest premier of the modern era.
Primarily for LDP members, Takaichi’s task will be to restore the fortunes of the party, which has governed almost non-stop since 1955.
Outgoing premier Ishiba took the reins last year, but his LDP-led coalition lost its majority in both houses of parliament, in part because of voter anger at inflation and an LDP slush fund scandal.
One party on the up is Sanseito, which echoes other populist movements in calling immigration a “silent invasion”, even though foreign-born residents make up only around three percent of the population.
Japan should “reconsider policies that allow in people with completely different cultures and backgrounds”, Takaichi had said during the LDP campaign.
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