Takaichi wins LDP race, markets cheer stimulus tilt - BBH

Sanae Takaichi was elected leader of Japan's ruling Liberal Democratic Party (LDP), putting her on course to become the country's first female prime minister once parliament confirms her appointment on October 15, BBH FX analysts report.

Japan's first female PM-elect sparks Nikkei surge

"Japan's financial market reaction reflected Takaichi's pro-stimulus fiscal and monetary agenda. The Nikkei rallied 5% to a record high. USD/JPY surged 2% to near 150.44, with the next two resistance levels offered at 150.92 (August 1 high) and 151.30 March double-top). Japan's yield curve steepened sharply as 2-year government bond yield fell as much as 6bps while 30-year bond yield rose 14bps. The swaps market slashed Bank of Japan (BOJ) October 30 rate hike bets from roughly 60% to 25%."

"Takaichi has consistently advocated for expansionary fiscal policy, calling for increased government spending, tax cuts, and cash support for households, funded if needed by new bond issuance. She also criticized BOJ's interest rate hikes. Nonetheless, Takaichi will face significant constraints to push ahead with her fiscally profligate pledges as the LDP does not have majorities in both bouses of parliament."

"Meanwhile, we are sticking to our view that the BOJ will resume normalizing rates at the upcoming October meeting. Japan's Tankan business survey points to an ongoing recovery in real GDP growth and underlying inflation is making good progress towards the BOJ's 2% target. Bottom line: we would lean against USD/JPY overshoot above 151.00 given that USD/JPY is trading well-above the level implied by US-Japan 2-year bond yield spreads."