Japan’s Likely First Female Prime Minister: Markets Hold Their Breath Ahead of Pivotal Vote
- Nexus Fintrade
- Oct 7
- 3 min read
TOKYO, Oct 3 — Japan stands at a historic crossroads this weekend as the ruling Liberal Democratic Party prepares to elect its next leader — a decision that will not only shape the nation’s political future but also send ripples through its stock and bond markets.
The contest has evolved into a delicate balancing act between household economic relief and fiscal restraint, as investors brace for potential shifts in government spending and central bank policy. With the resignation of fiscal conservative Shigeru Ishiba last month, markets have increasingly priced in a more flexible fiscal approach under his successor.
Among the front-runners, Sanae Takaichi — a veteran lawmaker and former cabinet minister — could become Japan’s first female prime minister, a milestone that has electrified both political observers and financial traders. Yet her reputation for bold economic ideas has left investors divided: some see her as a catalyst for renewed growth, others as a source of bond market turbulence.
Meanwhile, rivals Shinjiro Koizumi, the reformist farm minister, and Yoshimasa Hayashi, the current government spokesperson, are viewed as more market-stabilizing options who would likely maintain continuity in monetary policy.
“Koizumi and Hayashi are unlikely to interfere with the Bank of Japan,” said Takashi Fujiwara, Chief Fund Manager at Resona Asset Management. “Even if Takaichi wins, she seems to have softened her stance on ultra-loose monetary policy.”
Tension in the Bond Market
Japan’s government bond (JGB) market has been under strain for months, pressured by shrinking demand, reduced central bank support, and rising debt concerns. Those tensions intensified in July when Ishiba’s coalition lost upper house seats to parties promising tax cuts and fiscal stimulus — a loss that set the stage for his resignation and opened the door for Takaichi’s rise.
The so-called “Takaichi Trade” — bullish on equities and bearish on long-term bonds — emerged as investors bet she would push for aggressive spending and tax relief. Following Ishiba’s announcement on September 8, 30-year JGB yields hit a record 3.285%, while the Nikkei 225 surged to an all-time intraday high of 45,852.75 less than two weeks later.
As the leadership vote nears, however, some of those bets have cooled. The Nikkei climbed 1.5% on Friday afternoon, while long-term bond yields fell — a sign that traders expect either a Takaichi loss or a tempered policy approach if she wins.
Policy Uncertainty Looms
Takaichi has recently avoided direct promises of sales tax cuts and has stayed largely quiet on Bank of Japan policy, signaling a more cautious tone. Still, analysts believe her victory could trigger immediate market volatility — particularly a steepening of the yield curve and yen depreciation, according to Carl Ang of MFS Investment Management.
Short-term bond yields — the most sensitive to BOJ moves — have already climbed to 17-year highs, fueled by speculation that Koizumi might allow the central bank to raise interest rates in the coming months.
“Markets seem to be leaning toward a Koizumi win,” said Shoki Omori, Chief Strategist at Mizuho Securities. “But the real uncertainty is whether he’ll agree to tax cuts under coalition pressure — something that could upset Japan’s fragile fiscal balance.”
A Defining Moment for Japan
As the nation prepares for Saturday’s vote, the stakes could hardly be higher. Beyond the markets, the election represents a potential turning point in Japan’s political and social fabric.
If Takaichi prevails, she would not only make history as Japan’s first female prime minister, but also redefine how the country balances economic stimulus, fiscal prudence, and gender representation in leadership.
For now, the world — and the markets — are watching closely.
Win by dovish Takaichi could steepen yield curve, weaken yen.
The so-called Takaichi trade was long on stocks and bearish on JGBs, particularly longer tenors, on expectations she would push for tax cuts, fiscal stimulus, and easy monetary policy.
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