Japan’s Takaichi Win Triggers Bond Market Fears
Takaichi’s landslide victory cements a policy direction closely aligned with her mentor, former Prime Minister Shinzo Abe—favoring aggressive public spending and pro-growth stimulus. While markets initially responded with cautious optimism, analysts warn the renewed fiscal push could complicate the BoJ’s efforts to rein in inflation through rate hikes.
The administration has signaled plans for major state investment across defense, artificial intelligence (AI), and semiconductor industries. Economists say such measures, while potentially boosting strategic sectors, may also intensify inflationary pressures, limiting the central bank’s flexibility.
Makbule Deniz, assistant supervisor of strategy and investment at Istanbul-based brokerage firm Yatirim Finansman, told media that the BoJ is facing a “challenging situation.”
She emphasized that policymakers’ guidance and incoming economic indicators will be pivotal in the months ahead, noting that Japanese government bonds have global spillover effects given Japan’s central role in international capital markets.
“Unless the BoJ moves towards faster rate hikes, the weakness in bonds and the Japanese yen may continue,” she said. “Growth-oriented expansionary policies are expected to support stock markets, and in the long term, rising inflation expectations may push bond yields higher while weakening the yen against the US dollar, but it’s possible that the dollar/yen exchange rate will gain and reverse direction in the second half of the year with interest rate differentials beginning to narrow and in line with rate hikes.”
She added that market turbulence triggered by Takaichi’s political maneuvering has begun to ease.
“Despite Takaichi’s call for snap elections last month shaking global markets and triggering massive sell-offs in government bonds, the premier’s conciliatory statements over pursuing a sustainable and responsible fiscal policy brought about some normalization in the markets,” she added.
Deniz said Takaichi’s agenda centers on “economic security, including cybersecurity, supply chains, and critical minerals,” underscoring expectations that increased state spending could channel gains toward defense, nuclear energy, semiconductor manufacturing and AI. However, a softer yen may also give exporters a competitive lift.
“The Nikkei 225 has gained over 10% since the beginning of this year, while risk appetite is expected to rise in certain sectors—defense, nuclear energy, chips, and AI are among those with the potential to lead this rally in the index,” she said.
Currency markets remain volatile.
“The yen, having lost 6% since Takaichi took over the Liberal Democratic Party (LDP) in October 2025, is trading at 159–160 levels, while overnight index swaps show an increased possibility that the BoJ will be hiking its rates in April, while estimates indicate the bank will hike rates twice this year,” she added.
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