Following a three-day long weekend, Japanese stock markets opened higher. Rising expectations for an early domestic general election have rekindled the momentum of the so-called "Sanae Takaichi trade," while a weaker yen also provided a boost to exporters. In early Tuesday trading, the Nikkei 225 index rose 3.43% to 53,722.76 points; the broader Topix index gained 2.17%, reaching 3,590.40 points. The electronics, banking, and automobile sectors contributed the most to the Topix's advance. Meanwhile, the yen hovered around 158 per US dollar, nearing its weakest level since January 2025. The yield on Japan's 30-year government bond jumped 12 basis points to 3.52%. Speculation that Prime Minister Sanae Takaichi might dissolve the Diet as early as next month has continued to build since reports emerged in local media over the weekend. Market expectations that her Liberal Democratic Party could secure more votes in a potential election are fueling hopes for a comeback of the "Sanae Takaichi trade" – a market dynamic characterized by stock gains and a weaker yen, based on the Prime Minister's stance favoring expansionary fiscal policy and loose monetary policy. Analysts Ryota Sakagami and Keisha Ueda from Citigroup Research noted in a report, "A consensus is gradually forming in the market that the cabinet's high approval rating suggests a high probability of an LDP election victory, which would establish a stable political framework. Consequently, the initial reaction in the Japanese market is likely to be a renewed outbreak of the 'Sanae Takaichi trade'行情." They added that this trend is expected to drive "significant gains" for sectors benefiting from Takaichi's fiscal spending, such as defense and nuclear power, as well as forex-sensitive exporters like automobile manufacturers. The market also anticipates that if Takaichi secures a clearer mandate, her fiscal expansion stance will strengthen further, putting pressure on the Japanese government bond market. Sakagami and Ueda stated that rising long-term Japanese government bond yields would provide positive support for financial stocks such as banks. The yen weakened to a one-year low against the US dollar last Friday following news of the potential dissolution of the Diet. Japanese Finance Minister Satsuki Katayama said on Tuesday morning that she had informed US Treasury Secretary Scott Bessent of her concerns about one-sided movements in the yen. The yen pared some losses following these remarks. Katayama, speaking after meeting with Bessent, said, "I expressed concern about the one-sided weakening of the yen, and Treasury Secretary Bessent also shares such concerns." An attending finance ministry official revealed that both sides would continue close communication at the vice-ministerial level regarding currency movements. This meeting took place as the Federal Reserve faces new legal action from the Justice Department, sparking fresh worries that monetary policy could be subject to political interference. Fed Chair Jerome Powell said on Sunday that the central bank had received a grand jury subpoena and his testimony in June regarding the headquarters renovation could face criminal charge risks. Central Tanshi FX trader Takayuki Tominaga analyzed, "Following Katayama's warning, there was market movement pushing the yen stronger. Simultaneously, concerns are arising from the political pressure facing Powell, weighing on the US dollar." In 2024, Japanese authorities intervened in the currency market four times when the yen approached the 160 level, establishing an important reference point for potential future action. Katayama's emphasis on "one-sided movements" specifically points to the kind of disorderly market fluctuations that officials say could trigger further intervention. When the yen fell through the 157 level last December, Katayama had warned that Japan was "ready to take action freely at any time" to intervene in the market.
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