Sanae Takaichi scored a decisive victory in Japan’s election at the weekend. Could she unleash animal spirits in the country’s economy?
- Prime Minister Sanae Takaichi’s secured 316 out of 465 seats in the house
- The Nikkei is up over 5% since the start of the week, bringing its year-to-date gains to 14.5%
- Markets are hoping that she will “spend for growth”, with clear gains in targeted sectors
Japanese voters delivered a ringing endorsement for Prime Minister Sanae Takaichi’s economic agenda this weekend. She secured 316 out of 465 seats in the house, smoothing the path for her expansionist fiscal plans. Markets were delighted, with the Nikkei up over 5% since the start of the week.
It was an acceleration of an astonishing run for the Japanese stock market, which has now risen 14.52% since the start of the year. Japan funds have followed suit, up 12% over the same period. Only Latin America is ahead since the start of the year.
The markets are hoping that she will “spend for growth”. Nicola Takada Wood, managing director, Japan, at Asset Value Investors, says the win should provide political coherence and continuity at a time when households and corporates have been looking for a stronger signal on the direction of economic policy. “Her pro-growth stance, emphasis on revitalising domestic consumption, and clear support for private enterprise should help reinforce “animal spirits” that are already showing signs of recovery across parts of the economy.”
The ‘Takaichi trade’ is already evident, with sectors such as technology, AI, semiconductors and defence leading performance in expectation that they will be the beneficiaries of strategic investment. The Prime Minister has backed the country’s corporate governance reform, productivity enhancement, and policies that encourage capital efficiency. Takada Wood adds: “The larger end of the market has seen the benefits of these reforms, and we are seeing these tailwinds increasingly trickle down to small- and mid-cap companies through higher domestic demand, better pricing power, improved balance sheet discipline, and more shareholder-friendly behaviour.”
Nevertheless, there are risks. Both the yen and bond markets have wobbled ahead of the election, as there are fears that Takaichi’s measures will exacerbate Japan’s existing debt problems and push up borrowing costs. The 30-year Japanese government bond spiked to nearly 3.9% in late January, but has been relatively well-behaved in the aftermath.
The Japan Equity Research Team at Sumitomo Mitsui DS Asset Management says that “responsible proactive fiscal policy” should lift the economy in the short term, while “crisis management and growth investment” are expected to strengthen Japan’s growth potential over the medium to long term.
But the key is ‘responsible’. the bond market and the yen are likely to remain sensitive to any signs that Takaichi is spending excessively. As Liz Truss memorably found, it is easy to promise extravagant spending policies in pursuit of growth, but less simple to get them past the bond market. A crucial test will be whether Takaichi can deliver on her promise of zero consumption tax on food for two years. Will she be able to find the JPY 5 trillion to fund it?
Nevertheless, if it works, it could put a rocket under Japan’s sluggish economy. Markets are right to be optimistic, even if the risks are clear.
